Working Paper: CEPR ID: DP3888
Authors: Anna Bassanini; Jerome Pouyet
Abstract: The growing importance of inter-network exchanges in infrastructure-based utilities influences regulatory choices and access-pricing for downstream services using the networks. We analyse this problem in a setting where the infrastructure managers of two bordering countries are in charge of pricing the access to their networks for downstream transport firms that provide international services. Network costs can be financed either through a subsidy or solely through user charges. Access charges are affected by the incomplete internalization of consumers? surplus and infrastructure costs.Because of these distortions, it turns out that in a non-cooperative setting the second-best outcome consists in the simultaneous adoption of the no-subsidy system. Either this outcome is not an equilibrium, however, or the two countries could end up by choosing either the subsidy or the no-subsidy system, depending on the magnitude of the fixed costs of the networks and the characteristics of the final demand for services; moreover, in the latter case, the second-best outcome is not a stable equilibrium. Other properties of these equilibria are studied, as well as the impact of supra-national policies aimed at alleviating the excessive pricing of access on international services.The coordination problems deriving from the existence of different equilibria can, sometimes, be partially solved by separating the choice of a regulatory mode from the access pricing stage, thereby allowing the infrastructure managers to commit to use a specific financing system before setting the access price.
Keywords: infrastructure; financing; interconnected networks; Ramsey pricing
JEL Codes: L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Choice of financing system (G32) | Access charges (L90) |
| Access charges (L90) | Consumer surplus (D11) |
| Access charges (L90) | Welfare outcomes (I38) |
| Subsidy system in one country (H20) | Higher access price in neighboring country (P22) |
| Choice of financing system (G32) | Welfare outcomes (I38) |
| No-subsidy system (H29) | Better internalization of costs (D23) |
| Commitment to financing system (G32) | Likelihood of achieving socially optimal outcome (D61) |