Access regulation under asymmetric information about the entrant's efficiency

We study the impact of access regulation on an entrant's decision whether to invest in a telecommunications network or to ask for access when the regulator cannot observe its efficiency level. We show that an efficient entrant may have incentives to target low demand after entry in order to convince the regulator that it needs cheap access in the future. Therefore, the regulator must set access prices, contingent on demand, which penalize the inefficient entrant. We further show that, although linear prices are not always sufficient to promote the investment of an efficient entrant without introducing distortions, two-part tariffs already allow the regulator to achieve this objective.Access pricing Asymmetric information Signaling Revelation principle