Killing the Goose That May Have Laid the Golden Egg?
AbstractThe purpose of the paper is (1) to analyze the potential and the incentives for a vertically integrated input monopolist to engage in price-discrimination when there is downstream entry, and (2) to examine the question, whether a cost-based regulation of access charges for electricity grids enhances competition in the downstream-market. The paper shows that the incumbent will never block entry if the entrant is more efficient than the incumbent. The reason is that the input-monopolist can make more profit through input sales than it could generate by producing the downstream product itself. If the entrant does not have a cost advantage either the incumbent or the entrant gets a monopoly position. Providing for a level playing field by means of a cost-based regulation of access charges always creates competition in the downstream-market. The paper also derives the welfare effects of both the liberalization of the downstream-market and the cost-based regulation.
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discrimination; regulation; vertical integration; electricity; access charges; sabotage;
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-03-24 (All new papers)
- NEP-COM-2007-03-24 (Industrial Competition)
- NEP-ENE-2007-03-24 (Energy Economics)
- NEP-MIC-2007-03-24 (Microeconomics)
- NEP-REG-2007-03-24 (Regulation)
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