Managerial incentives and access price regulation

Policy makers have identified the non-discrimination principle as a key instrument to regulate vertically integrated firms in control of upstream bottlenecks. It has been argued that the non-discrimination principle may create a level playing field, but at the expense of higher consumer prices. However, this rests on the assumption that the firms do not respond strategically to the regulation. We show that a non-discrimination requirement makes the vertically integrated firm behave more aggressively. Consequently, non-discrimination regulation rarely creates a level playing field. Neither does it necessarily increase end-user prices. Indeed, we show that end-user prices may fall.