. The paper studies the net effect of restructuring on retail prices
and cost-reducinginvestment and discusses policy implications.
JEL classification: D43, L43.
Keywords: Access pricing; investment; double marginalization; vertical fore-
closure; product differentiation.
It is widely believed that introducing competition is the key to achieving the
full benefits of privatization in previously monopolized and regulated
network industries, such as telecommunications, electricity or railways.1
The recent wave of ‘deregulation’ in these industries – i
6 Hence a firm’s investment xa is given by
ðga þ nÞ2
1 ¼ 0 ð11Þ
where ga :5 gi(xa, xa).
7 Implicit differentiation of (11) shows that investments
under the GPS increase in the output price. Intuitively, for any given
innovation yi a higher price induces more output [see (6)]. This makes cost-
reducinginvestments more beneficial.
Using (6) and (9), expected overall output is
qaðpÞ :¼ E qi þ qjjxa
sE yni jxa
ga þ n
The effect of spillovers on investments and output depends on the
characteristics of the
welfare implications, which differ from, for example, Cremer et al. (1991) and
others, come from the welfare-maximizing price regulation, not from a location
subgame. However, with endogenous production costs, privatization of the public
firm would improve welfare compared with a mixed duopoly because it would
mitigate the loss arising from excessive cost-reducinginvestments of the private
firm (Matsumura and Matsushima, 2004).
In price-regulated markets such as the hospital industry, firms rather compete in
quality or location than in prices (Brekke, 2004