Pricing Access to a Monopoly Input

Authors: David S. Sibley¹; Michael J. Doane²; Michael A. Williams²; Shu-Yi Tsai³

Source: Journal of Public Economic Theory, Volume 6, Number 4, October 2004 , pp. 541-555(15)

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Abstract:

What price should downstream entrants pay a vertically integrated incumbent monopoly for use of its assets? Courts, legislators, and regulators have at times mandated that incumbent monopolies lease assets required for the production of a retail service to entrants in efforts to increase the competitiveness of retail markets. This paper compares two rules for pricing such monopoly inputs: marginal cost pricing (MCP) and generalized efficient component pricing rule (GECPR). The GECPR is not a fixed price, but is a rule that determines the input price to be paid by the entrant from the entrant's retail price. Comparing the retail market equilibrium under MCP and GECPR, the GECPR leads to lower equilibrium retail prices. If the incumbent is less efficient than the entrant, the GECPR also leads to lower production costs than does the MCP rule. If the incumbent is more efficient than the entrant, however, conditions may exist in which MCP leads to lower production costs than does the GECPR. The analysis is carried out assuming either Bertrand competition, quantity competition, or monopolistic competition between the incumbent and entrant in the downstream market.

Document Type: Research article

DOI: http://dx.doi.org/10.1111/j.1467-9779.2004.00179.x

Affiliations: 1: University of Texas at Austin and U.S. Department of Justice 2: ERS Group 3: Virginia Tech

Publication date: 2004-10-01