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Bottleneck co-ownership as a regulatory alternative

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  • Federico Boffa

    ()
    (University of Macerata)

  • John Panzar

    ()
    (University of Auckland)

Abstract

This paper proposes a regulatory mechanism for vertically related industries in which the upstream “bottleneck” segment faces significant returns to scale while other (downstream) segments may be more competitive. In the proposed mechanism, the ownership of the upstream firm is allocated to downstream firms in proportion to their shares of input purchases. This mechanism, while preserving downstream competition, partially internalizes the benefits of exploiting economies of scale resulting from an increase in downstream output. We show that this mechanism is more efficient than a disintegrated market structure in which the upstream natural monopoly bottleneck sets a price equal to average cost.

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Bibliographic Info

Paper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2011/38.

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Length: 25 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:ieb:wpaper:2011/12/doc2011-38

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Keywords: Regulation; vertically related industries; co-ownership;

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References

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  1. Park, Yong-Sam & Ahn, Byong-Hun, 1999. "Joint ownership and interconnection pricing in network industries," International Review of Economics & Finance, Elsevier, vol. 8(2), pages 183-198, June.
  2. Mark Armstrong & David E.M. Sappington, 2006. "Regulation, Competition and Liberalization," Journal of Economic Literature, American Economic Association, vol. 44(2), pages 325-366, June.
  3. Vickers, John, 1995. "Competition and Regulation in Vertically Related Markets," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 1-17, January.
  4. Beard, T Randolph & Kaserman, David L & Mayo, John W, 2001. "Regulation, Vertical Integration and Sabotage," Journal of Industrial Economics, Wiley Blackwell, vol. 49(3), pages 319-33, September.
  5. Bresnahan, Timothy F. & Salop, Steven C., 1986. "Quantifying the competitive effects of production joint ventures," International Journal of Industrial Organization, Elsevier, vol. 4(2), pages 155-175, June.
  6. Daniel F. Spulber, 1989. "Regulation and Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262192756, December.
  7. Kenneth Fjell & Øystein Foros & Debashis Pal, 2006. "Endogenous Average Cost Based Access Pricing," University of Cincinnati, Economics Working Papers Series 2006-01, University of Cincinnati, Department of Economics.
  8. Philip G. Gayle, 2008. "An Empirical Analysis of the Competitive Effects of the Delta/Continental/Northwest Code-Share Alliance," Journal of Law and Economics, University of Chicago Press, vol. 51(4), pages 743-766, November.
  9. Kühn, Kai-Uwe & Vives, Xavier, 1995. "Excess Entry, Vertical Integration and Welfare," CEPR Discussion Papers 1293, C.E.P.R. Discussion Papers.
  10. Lee, Sang Hyup & Hamilton, Jonathan H, 1999. "Using Market Structure to Regulate a Vertically Integrated Monopolist," Journal of Regulatory Economics, Springer, vol. 15(3), pages 223-48, May.
  11. Loeb, Martin & Magat, Wesley A, 1979. "A Decentralized Method for Utility Regulation," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 399-404, October.
  12. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58, pages 347.
  13. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
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Cited by:
  1. Steffen Hoernig & Ingo Vogelsang, 2012. "The Ambivalence of Two-Part Tariffs for Bottleneck Access," FEUNL Working Paper Series wp568, Universidade Nova de Lisboa, Faculdade de Economia.
  2. Ingo Vogelsang, 2013. "The Endgame of Telecommunications Policy? A Survey," Review of Economics, Lucius & Lucius, vol. 64(3), pages 193-269.
  3. Kenneth Fjell & Oystein Foros & Hans Jarle Kind, 2013. "On the Choice of Royalty Rule to Cover Fixed Costs in Input Joint Ventures," CESifo Working Paper Series 4332, CESifo Group Munich.
  4. Kenneth Fjell & Debashis Pal & David Sappington, 2013. "On the performance of endogenous access pricing," Journal of Regulatory Economics, Springer, vol. 44(3), pages 237-250, December.

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