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The optimal industry structure in a vertically related market

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  • Raffaele Fiocco

Abstract

We consider a vertically related market characterized by down- stream imperfect competition and by the monopolistic provision of an essential facility-based input, whose price is set by a social-welfare maximizing regulator. Our model shows that the regulatory knowl- edge about the cost for providing the monopolistic input crucially af- fects the design of the optimal industry structure. In particular, we compare ownership separation, which prevents a single company from having the control of both upstream and downstream operations, and legal separation, under which these activities are legally unbundled but common ownership is allowed. As long as the regulator has full infor- mation, the two industry patterns yield the same social welfare level. However, under asymmetric information about the input costs legal separation can make the whole society better off.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2010-024.

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Length: 42 pages
Date of creation: Apr 2010
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2010-024

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Keywords: access charge; legal separation; ownership separation; regulation;

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