Essential facility financing and market structure

The paper analyzes the funding of an infrastructure project when an incumbent operator has private information about market profitability and the regulator does not have access to taxpayers' money. An open access policy raises welfare, but may make the project non-viable since funding must be provided by operators' capital contributions. We characterize the optimal market structure. The regulator can ask the incumbent to bear a higher share of investment cost if the latter insists on an exclusive use. Yet, the incumbent is willing to pay more for exclusivity, the higher the demand, that is precisely when competition yields the highest benefits. At the optimum, the incumbent's information is not used to determine market structure. We further investigate the implications of this basic result: In a dynamic context, we show that the monopoly franchise policy is time-consistent while an open access policy is not; we also demonstrate that a threat of regulatory capture creates an open access presumption. Last, we show that when the decision involves multiple projects, monopoly segments should cross-subsidize open access ones. (C) 2002 Elsevier B.V. All rights reserved.