Network interconnectivity with competition and regulation

A simple theoretical network model is introduced to investigate the problem of network interconnection. Prices, profits and welfare are compared under welfare maximisation, network monopoly and a scenario with competition over one part of the network. Given that inducing actual competition may bring disbenefits such as cost duplication and co-ordination costs, we also explore the possibility of a regulator using the threat of entry on a section of the monopoly network in order to bring about the socially preferred level of interconnectivity. We show that there are feasible parameter values for which such a threat is plausible.

► We model a simple theoretical transport network.
► We investigate the problem of network interconnection.
► Welfare maximisation, network monopoly and entry regimes are compared.
► (Potential) Entry can be used to bring about the society’s preferred level of interconnection.