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Regulated Input Price, Vertical Separation, and Leadership in Free Entry Markets

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  • Toshihiro Matsumura
  • Noriaki Matsushima

Abstract

We examine incentives of bottleneck facility holders to manipulate access charge accounting in free entry downstream markets. We consider the situation wherein one firm holds an upstream bottleneck facility and new entrants use it at the regulated price (access fee) to provide final products. The bottleneck facility holder affects the regulated input price. We investigate how vertical separation affects the incentive for manipulation and the resulting input price. We find that the results depend on whether the incumbent is the Stackelberg leader in the product market. If the incumbent cannot take leadership in the product market and faces Cournot competition, vertical separation reduces the incentive for manipulation and the resulting input price. The opposite result is derived when the incumbent can take leadership in the product market.

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Paper provided by Institute of Social and Economic Research, Osaka University in its series ISER Discussion Paper with number 0853.

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Date of creation: Aug 2012
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Handle: RePEc:dpr:wpaper:0853

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  1. Federico Etro, 2006. "Aggressive leaders," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 146-154, 03.
  2. David Mandy & David Sappington, 2007. "Incentives for sabotage in vertically related industries," Journal of Regulatory Economics, Springer, vol. 31(3), pages 235-260, June.
  3. Alvaro Bustos & Alexander Galetovic, 2003. "Vertical Integration and Sabotage in Regulated Industries," Documentos de Trabajo 164, Centro de Economía Aplicada, Universidad de Chile.
  4. GAUTIER, Axel & MITRA, Manipushpak, . "Regulation of an open access essential facility," CORE Discussion Papers RP -2053, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Richard Higgins & Arijit Mukherjee, 2010. "Deregulation redux: does mandating access to bottleneck facilities necessarily improve welfare?," Public Choice, Springer, vol. 142(3), pages 363-377, March.
  6. Keizo Mizuno & Tetsuya Shinkai, 2006. "Delegating Infrastructure Projects with Open Access," Journal of Economics, Springer, vol. 88(3), pages 243-261, 09.
  7. W. Kip Viscusi & Joseph E. Harrington & John M. Vernon, 2005. "Economics of Regulation and Antitrust, 4th Edition," MIT Press Books, The MIT Press, edition 4, volume 1, number 026222075x, December.
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