Pricing regulation under bypass competition

We analyze optimal pricing policies in local telecommunications subject to bypass for the access of long-distance carriers. We first consider the case of a regulated monopoly that operates the local network and also has access to an additional technology (bypass) more efficient for large customers, We then study how competition in bypass affects the optimal nonlinear pricing policy and the resulting allocation. When transfers are allowed between the regulator and the network operator, bypass competition benefits consumers at the expense of the taxpayer, otherwise it benefits large consumers but hurts small ones.