Access regulation and strategic transfer pricing

Abstract

Access price regulation is used in telecommunications to prevent a vertically integrated firm, which controls an essential input, from raising the rivals' costs. When the authorities remove the access price as a strategic tool, it becomes optimal for the regulated firm to use the transfer price as an alternative strategic device. Ironically, the tools authorities use to implement access price regulation, such as accounting separation and transparency, may facilitate the regulated firm's use of the transfer price to reduce competition. Furthermore, the transition from FAC to LRIC-based access pricing makes strategic transfer pricing more relevant and provides a legitimate excuse for it. Consequently, the regulation may protect the rivals (and the regulated firm) from competition to the detriment of consumers. © 2007 Elsevier Ltd. All rights reserved.