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. The paper studies the net effect of restructuring on retail prices and cost-reducing investment and discusses policy implications. JEL classification: D43, L43. Keywords: Access pricing; investment; double marginalization; vertical fore- closure; product differentiation. 1. INTRODUCTION 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

investment stage. 6 Hence a firm’s investment xa is given by ps s n @gi @xi xa 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- reducing investments more beneficial. Using (6) and (9), expected overall output is qaðpÞ :¼ E qi þ qjjxa ¼ 2p 1 sE yni jxa ¼ 2p 1 s ga ga þ n ð12Þ The effect of spillovers on investments and output depends on the characteristics of the

where 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-reducing investments 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