The optimal access price in a vertically related industry

An important component of the National Competition Policy is the regulation of access prices for major infrastructure facilities. The primary goal of regulation is to protect rival firms from anti-competitive measures of the owners of such facilities. It is commonly held that the regulation ofaccess price does not necessarily benefit the non-integrated downstream rivals, since the access price may act as a collusive device to restrict output in the downstream market that will enhance profits accruing to all competitors. We contest this important finding: we develop a sequential game to examine an industry characterised by naturally monopolistic and potentially competitive activities that are vertically related. We establish that in the perfect Nash equilibrium of the proposed game the integrated firm has an incentive and an ability to use the access price in the upstream market to leverage into a position of power in the downstream market to the detriment of its rivals. It is hence essential to regulate access prices in such markets to protect non-integrated rivals and to promote competition.