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Vertical Mergers and Competition with a Regulated Bottleneck Monopoly

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Author Info

  • Galetovic Alexander

    ()
    (Universidad de los Andes)

  • Sanhueza Ricardo

    ()
    (Universidad de los Andes)

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    Abstract

    Consider a bottleneck monopoly whose access charge is regulated above marginal cost and produces an essential input used by an oligopoly of downstream firms. Should the monopolist be allowed to vertically integrate into the downstream market? Policy makers often argue that the vertically integrated subsidiary enjoys an undue advantage, because it receives access at marginal cost. We show that there is no undue advantage.With perfect competition downstream vertical integration is irrelevant because the subsidiary substitutes downstream output one-to-one and faces a per-unit opportunity cost equal to the access charge.With an oligopoly consumers and the bottleneck monopoly gain with vertical integration. By contrast, competitors lose oligopolistic rents. Social welfare increases, unless output is redistributed towards a very inefficient vertically integrated firm.

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    Bibliographic Info

    Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

    Volume (Year): 9 (2009)
    Issue (Month): 1 (October)
    Pages: 1-20

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    Handle: RePEc:bpj:bejeap:v:9:y:2009:i:1:n:45

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    Web page: http://www.degruyter.com

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    Web: http://www.degruyter.com/view/j/bejeap

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    Cited by:
    1. Galetovic, Alexander & Muñoz, Cristián M., 2011. "Regulated electricity retailing in Chile," Energy Policy, Elsevier, vol. 39(10), pages 6453-6465, October.

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