Extending competition in network industries: Can input markets circumvent the need for an administered access regime?

• Unbundling has allowed competition but is founded on command and control.
• Substituting input market would be a major step towards deregulation.
• The scope for creating such markets is reviewed with respect to six different inputs.
• Such market must be well designed and adequately competitive.

Unbundling bottlenecks in the value chain of network industries has made it possible to introduce retail and some upstream competition into the sectors, but access to the unbundled assets, and to certain natural inputs, is generally achieved by a command and control administrative process which defines access products and sets administrative prices for them. Yet this mode of price setting and allocation is contentious, difficult and fallible. The paper explores the alternative approach of using input markets. Six examples are reviewed: three relating to natural resources (spectrum, water abstraction rights and natural gas), and three to manufactured inputs (airport landing slots, trail paths and access to pipes and wires). The analysis shows that market design is crucial; that achieving effective competition without structural measures is problematic; and that some markets have to be built on regulatory underpinnings. However, the potential benefits are large and lessons learnt can be applied elsewhere.