Strategic Investment under Open Access: Theory and Evidence

Abstract

We examine the incentives of access-regulated firms to invest in infrastructure facilities they must share with competitors. We show that investment incentives can be decomposed into a non-strategic and a strategic part. The non-strategic part implies that investment depends positively on market size. The strategic incentives imply that investment also depends on market composition, namely, the market shares of the facility owner and its competitors. Using a dataset of regulated electric utilities in the United States, we find evidence that transmission investments are indeed made strategically. Ceteris paribus, utilities are less likely to invest, and investment levels are lower, when competitors occupy a larger share of the market.