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Strategic Investment and Bypass under Access Price Regulation ∗

This paper examines welfare implications of an incumbent’s strategic infrastructure investment in an open access environment. In our model, an entrant is allowed to not only access the incumbent’s infrastructure but also have an opportunity to use a bypass technology (i.e., a substitute for the infrastructure) as an outside option. Then, the (horizontal and vertical) market structures are endogenously determined by the incumbent’s investment in infrastructure. We show that in equilibrium, the incumbent strategically gives birth to insufficient access to its infrastructure and excessive use of bypass technology from a welfare viewpoint. We also show that excess entry with access or with bypass occurs in equilibrium, when the incumbent’s investment technology is efficient and a spillover effect generated by access is small.