Instrument insufficiency in access-pricing regulation of telecommunications

Access prices to bottleneck facilities are usually set by regulatory authorities because owners have an incentive to charge socially undesirable access prices We show that welfare-maximising access prices may not he implementable through usual regulatory practices due to what we term instrument insufficiency. We also discuss conditions affecting the likelihood of instrument inefficiency. We pursue our analysis by considering a market structure and regulatory setting closely adhering to the reality of many telecommunications markets. We consider a two-tier industry structure in which the monopolist owner of a bottleneck input also operates in the downstream market, facing competition front a fixed number of nonintegrated firms. The regulator sets the upstream and access prices but not the downstream price, with the number of downstream firms exogenously given.