The access pricing problem: A synthesis

The Baumol-Willig efficient component pricing rule states that it is efficient to set the price of access to an essential facility equal to the direct cost of access plus the opportunity cost to the integrated access provider. We analyze the relevant notion of 'opportunity cost' under various assumptions about demand and supply conditions, including product differentiation, bypass and substitution possibilities, which all reduce opportunity cost compared to the benchmark case. We show that the Ramsey approach to access pricing developed by Laffont and Tirole [1994] is closely related to the ECPR provided opportunity cost is correctly interpreted.