Parity Pricing and Its Critics: A Necessary Condition for Efficiency in the Provision of Bottleneck Services to Competitors

Abstract

This paper discusses proper pricing of a monopoly input needed by both its owner and its owner's competitors in the final-product market. This issue is central to current litigation in courts and regulatory agencies throughout the world's industrial nations as competitive entry, deregulation, and privatization proceed. A new, simplified proof shows that only pricing based on what has come to be called the parity-pricing formula or efficient component-pricing rule ("ECPR") permits economic efficiency and competitive neutrality-giving neither the bottleneck owner nor its rivals a competitive advantage in final-product sales, aside from any derived from superior productive efficiency. This paper comments on a number of recent discussions of ECPR, showing that the bulk of their reservations, while valid, do not undermine ECPR, but, instead, call for supplementary rules that we have advocated all along.