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Legal unbundling can be a golden mean between vertical integration and ownership separation

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  • Höffler, Felix
  • Kranz, Sebastian

Abstract

We study an industry in which an upstream monopolist supplies an essential input at a regulated price to several downstream firms. Legal unbundling means in our model that a downstream firm owns the upstream firm, but this upstream firm is legally independent and maximizes its own upstream profits. We allow for non-tariff discrimination by the upstream firm and show that under quite general conditions legal unbundling never yields lower quantities in the downstream market than ownership separation and integration. Therefore, typically, consumer surplus will be largest under legal unbundling. Outcomes under legal unbundling are still advantageous when we allow for discriminatory capacity investments, investments into marginal cost reduction and investments into network reliability. If access prices are unregulated, however, legal unbundling may be quite undesirable.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 29 (2011)
Issue (Month): 5 (September)
Pages: 576-588

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Handle: RePEc:eee:indorg:v:29:y:2011:i:5:p:576-588

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Web page: http://www.elsevier.com/locate/inca/505551

Related research

Keywords: Network industries Regulation Vertical relations Investments Ownership Sabotage;

References

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Citations

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Cited by:
  1. Schober, Dominik, 2013. "Static vs. dynamic impacts of unbundling: Electricity markets in South America," ZEW Discussion Papers 13-033, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Felix Höffler & Sebastian Kranz, 2011. "Imperfect legal unbundling of monopolistic bottlenecks," Journal of Regulatory Economics, Springer, vol. 39(3), pages 273-292, June.
  3. Gugler, Klaus & Rammerstorfer, Margarethe & Schmitt, Stephan, 2013. "Ownership unbundling and investment in electricity markets — A cross country study," Energy Economics, Elsevier, vol. 40(C), pages 702-713.
  4. Isabel Soares & Paula Sarmento, 2012. "Unbundling in the Telecommunications and the Electricity Sectors: How Far should it Go?," European Research Studies Journal, European Research Studies Journal, vol. 0(Special I), pages 157-194.
  5. Raffaele Fiocco, 2012. "Competition and regulation with product differentiation," Journal of Regulatory Economics, Springer, vol. 42(3), pages 287-307, December.
  6. Nikogosian, Vigen & Veith, Tobias, 2011. "Vertical integration, separation and non-price discrimination: An empirical analysis of German electricity markets for residential customers," ZEW Discussion Papers 11-069, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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