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The Optimal Institutional Design of Vertically Related Markets with Unknown Upstream Costs

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  • Fiocco Raffaele

    (Humboldt-Universität zu Berlin, Institute for Economic Theory I, Spandauer Str. 1, D-10178 Berlin, Germany)

Abstract

This paper examines the design of vertically related industries with a regulated monopolistic upstream input and competitive downstream activities. Two institutional patterns are investigated. Ownership separation entails full unbundling between upstream and downstream activities. Legal separation allows a downstream firm to own the upstream monopolist but requires the two entities to be legally unbundled so that each service is stand-alone profitable and only upstream profits are regulated. Under regulatory limited information about upstream costs, the legally separated monopolist exhibits countervailing incentives to manipulate costs. This alleviates the regulator’s control problem and yields higher welfare than ownership separation.

Suggested Citation

  • Fiocco Raffaele, 2013. "The Optimal Institutional Design of Vertically Related Markets with Unknown Upstream Costs," Review of Network Economics, De Gruyter, vol. 12(2), pages 183-210, June.
    • Handle: RePEc:bpj:rneart:v:12:y:2013:i:2:p:183-210:n:3
    DOI: 10.1515/rne-2012-0014
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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