Managerial incentives and access price regulation

Policy makers have identified the non-discrimination principle as a key instrument to regulate vertically integrated firms in control of upstream bottlenecks. Economists argue that the non-discrimination principle may create a level playing field, but at the expense of higher consumer prices. However, this rests on the assumption that the firms do not respond strategically to the regulation. We show that when the owners of the retail firms decide which type of manager to employ, they will respond to non-discrimination rules by hiring a more aggressive manager. Consequently, non-discrimination regulation rarely creates a level playing field. Neither does it necessarily lead to higher end-user prices. Indeed, we show that end-user prices may actually fall.