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Legal Unbundling can be a Golden Mean between Vertical Integration and Separation

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  • Felix Höffler
  • Sebastian Kranz

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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 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 yields (weakly) higher quantities in the downstream market than vertical 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

Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse15_2007.

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Length: 35
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:bon:bonedp:bgse15_2007

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
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Web page: http://www.bgse.uni-bonn.de

Related research

Keywords: Network industries; regulation; vertical relations; investments; ownership; sabotage;

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References

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  1. Dixit, Avinash K, 1987. "Strategic Behavior in Contests," American Economic Review, American Economic Association, vol. 77(5), pages 891-98, December.
  2. Gibbons, Robert, 2005. "Four forma(lizable) theories of the firm?," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 200-245, October.
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  6. Ellingsen, Tore, 1997. "Efficiency Wages and X-Inefficiencies," Working Paper Series in Economics and Finance 180, Stockholm School of Economics.
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  9. Muller, Holger M & Warneryd, Karl, 2001. "Inside versus Outside Ownership: A Political Theory of the Firm," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 527-41, Autumn.
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Citations

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Cited by:
  1. Silvester Koten, 2013. "Legal unbundling and auctions in vertically integrated (utilities) markets," European Journal of Law and Economics, Springer, vol. 36(3), pages 543-573, December.
  2. Schmidt, Klaus M., 2008. "Complementary Patents and Market Structure," CEPR Discussion Papers 7005, C.E.P.R. Discussion Papers.
  3. Growitsch, Christian & Stronzik, Marcus, 2011. "Ownership Unbundling of Gas Transmission Networks - Empirical Evidence," EWI Working Papers 2011-7, Energiewirtschaftliches Institut an der Universitaet zu Koeln.
  4. Silvester van Koten, 2011. "Merchant interconnector projects by generators in the EU: Effects on profitability and allocation of capacity," RSCAS Working Papers 2011/10, European University Institute.
  5. Martin Hellwig, 2008. "Competition Policy and Sector-Specific Regulation for Network Industries," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2008_29, Max Planck Institute for Research on Collective Goods.
  6. Alessandro Avenali & Giorgio Matteucci & Pierfrancesco Reverberi, 2010. "How does vertical industry structure affect investment in infrastructure quality?," DIS Technical Reports 2010-08, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza".
  7. Thomas-Olivier Léautier & Véronique Thelen, 2009. "Optimal expansion of the power transmission grid: why not?," Journal of Regulatory Economics, Springer, vol. 36(2), pages 127-153, October.

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