Assignment:
Consider an integrated monopolist producing two complementary goods, the upstream network good, and the downstream good that is sold to final consumers. [You can think of the example of local telephone service and long distance service if you wish). Suppose that a unit of final output requires one unit of access as well as other costs of C E for an entrant and C I , for the integrated incumbent. Let the unit cost of access be b.
a. If P I , is the incumbent price downstream, what is the access price charged to an entrant based on the Efficient Component Pricing Rule (ECPR)?
b. Show that, by pricing access using the ECPR, profitable entry will only occur if the entrant is more efficient than the incumbent.