DP2802 Essential Facility Financing and Market Structure

Author(s): Bernard Caillaud , Jean Tirole

Publication Date: May 2001

Keyword(s): Essential Facility , Access , Competition , Financing

JEL(s): D40 , L51

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP2802.asp

The Paper analyses the funding of an infrastructure project (high speed train line, platform, tunnel, harbor, regional airport, fibre-to-the-home network, etc.) in a situation in which an incumbent operator has private information about market profitability (demand, cost) and the infrastructure owner is subject to a budget constraint, either on a per project basis or over the entire infrastructure. An open access policy raises welfare, but may make the project non-viable since funding must be provided by capital contributions and access charges. The infrastructure owner can ask the incumbent for a higher capital contribution if the latter insists on an exclusive use. Yet, such screening is at odds with social goals: The incumbent is willing to pay more for exclusivity, the higher the demand (the lower the cost), that is precisely when competition yields the highest benefits. At the optimum, the incumbent's information impacts the decision of whether to build the infrastructure, but is not used to determine market structure. The Paper further shows that an absence of long-term licencing favours monopoly franchising, while a threat of regulatory capture creates an open-access presumption.