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Organisational Structures in Network Industries – An Application to the Railway Industry

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  • Benjamin Pakula

    ()
    (University of Giessen)

  • Georg Götz

    (University of Giessen)

Abstract

This paper analyses the incentives to upgrade input quality in vertically related (network) industries. Upstream investments have a biased effect on the downstream companies and lead to vertical product differentiation. Different vertical structures such as vertical integration, ownership and legal unbundling lead to different investments. We find that, without regulation, vertical integration and legal unbundling regimes provide highest investment incentives and lead to highest welfare. However, we also find foreclosure in the downstream market if the potential degree of horizontal product differentiation of the entrant is low. Under ownership unbundling, investment incentives are lower but there is never foreclosure of the entrant since this would worsen double marginalisation. When the network operator is subject to a break-even regulation, the investment incentives are crowded out under legal and ownership unbundling whereas they remain nearly unchanged under vertical integration. Welfare and co umer surplus decrease under legal unbundling, but increase under the two other regimes.

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File URL: http://www.uni-marburg.de/fb02/makro/forschung/magkspapers/09-2011_pakula.pdf
File Function: First version, 2011
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Bibliographic Info

Paper provided by Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) in its series MAGKS Papers on Economics with number 201109.

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Length: 38 pages
Date of creation: 2011
Date of revision:
Publication status: Forthcoming in
Handle: RePEc:mar:magkse:201109

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Keywords: Vertical Integration; Investment; Foreclosure; Regulation;

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  1. Benz, Men-Andri & Bühler, Stefan & Schmutzler, Armin, 2003. "Infrastructure Quality in Deregulated Industries: Is there an Underinvestment Problem?," CEPR Discussion Papers 3836, C.E.P.R. Discussion Papers.
  2. Arne Feddersen & Gabriel Ahlfeldt, 2011. "From Periphery to Core: Economic Adjustments to High Speed Rail," ERSA conference papers ersa11p545, European Regional Science Association.
  3. Cremer, Helmuth & Crémer, Jacques & De Donder, Philippe, 2006. "Legal vs Ownership Unbundling in Network Industries," CEPR Discussion Papers 5767, C.E.P.R. Discussion Papers.
  4. Vareda, João, 2007. "Unbundling and Incumbent Investment in Quality Upgrades and Cost Reduction," FEUNL Working Paper Series wp526, Universidade Nova de Lisboa, Faculdade de Economia.
  5. Russell Pittman, 2007. "Make or buy on the Russian railway? Coase, Williamson, and Tsar Nicholas II," Economic Change and Restructuring, Springer, vol. 40(3), pages 207-221, September.
  6. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
  7. Thomas Ehrmann & Karl-Hans Hartwig & Torsten Marner & Hendrik Schmale, 2009. "Specific Investments and Ownership Structures in Railways – An Experimental Analysis," Working Papers 12, Institute of Transport Economics, University of Muenster.
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