Regulation and access pricing: Comparison of regulated regimes

The statutory duties of regulators of British utilities include both the en couragement of competition and protection of consumers (through price caps) . Competition depends on the terms on which new entrants can gain access to the monopolist's network. Where the incumbent in the retail market also ow ns the network, the regulator may determine prices in the capped and access markets separately or may make the price cap explicitly dependent on entry in the uncapped market. Contrary to the received wisdom that access charge s should be separately regulated we show that higher welfare can be obtaine d in some circumstances by allowing the incumbent to determine access charg es. This is achieved by permitting the incumbent to choose from a menu of r etail prices which the regulator makes conditional on the extent of entry i n the retail market.