Two-Part Access Pricing and Imperfect Competition

The problem of a monopolist firm that supplies an essential input to other firms that compete in the final downstream market is crucial in many utility industries that use a network. When downstream firms have different degrees of efficiency, then it could be feasible to charge them different access prices for the essential input. This is a typical problem of third-degree price discrimination that has been extensively analyzed when it is practiced upon final consumers. If discrimination occurs in the wholesale market, then firms are customers with interrelated demand, a feature that distinguishes the problem from final goods price discrimination. In the current phase of liberalization of the telecommunications industry, regulatory constraints are being progressively removed as competition develops. This paper deals with one of such constraints, namely whether input price discrimination is likely to improve social welfare. I consider a vertically separated industry with an upstream monopolist who supplies an essential input to two downstream Cournot firms. Since non-linear pricing occurs more often in intermediate markets than in final good markets, I allow for more complex tariffs. The contribution of the paper is twofold. In the first part it solves the problem of regulated access pricing with two-part discriminatory tariffs. In line with the intuition, these access schemes correspond to an increase in the number of regulatory tools, so that they can be used to increase social welfare. In the second part, a similar problem is analyzed in an unregulated setting. It is found that discrimination may produce adverse welfare effects when it is practiced by the unregulated upstream firm. The results depend on the cost functions of downstream producers and on the concavity of the demand function. I show conditions under which welfare is reduced with price discrimination that generalize previous results in the literature