Legal vs Ownership Unbundling in Network Industries
AbstractThis paper studies the impact of legal unbundling vs ownership unbundling on the incentives of a network operator to invest and maintain its assets. We consider an industry where the upstream firm first chooses the size of a network, while several downstream firms then compete in selling goods and services that use this network as a necessary input. We contrast the (socially) optimal allocation with several equilibrium situations, depending on whether the upstream firm owns zero, one or two downstream firms. The first situation corresponds to ownership unbundling between upstream and downstream parts of the market. As for the other two cases, we equate legal unbundling with the following two assumptions. First, each downstream firm maximizes its own profit, without taking into account any impact on the upstream firm's profit. Second, the upstream firm is not allowed to discriminate between downstream firms by charging different access charges for the use of its network. On the other hand, we assume that the upstream firm chooses its network size in order to maximize its total profit, including the profit of its downstream subsidiaries. Our main results are as follows. Because the investment in the network is not protected, at the time at which it is made, by a contract, the upstream firm will not take into account the interests of its clients when choosing its size. This effect can be mitigated by allowing it to own part of the downstream industry. In other words, ownership separation is more detrimental to welfare than legal unbundling. We also obtain that these results are robust to the introduction of asymmetry in network needs across downstream firms, imperfect downstream competition and downstream investments.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5767.
Date of creation: Jul 2006
Date of revision:
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Other versions of this item:
- Cremer, Helmuth & Crémer, Jacques & De Donder, Philippe, 2006. "Legal vs Ownership Unbundling in Network Industries," IDEI Working Papers 405, Institut d'Économie Industrielle (IDEI), Toulouse.
- L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-10-28 (All new papers)
- NEP-NET-2006-10-28 (Network Economics)
- NEP-REG-2006-10-28 (Regulation)
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