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Does Structure Dominate Regulation? The Case of an Input Monopolist

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  • King, S.P.

Abstract

This paper constructs a simple repeated game model to analyze how industry outcomes alter if a regulated input monopolist is allowed to integrate into the downstream retail market. Integration helps overcome double marginalization-a feature well known in the existing literature. Unlike existing static models, however, integration also makes tacit collusion more difficult in a repeated game framework. If the regulated input price exceeds marginal cost, an integrated monopolist has an incentive to increase retail sales as this raises upstream profits. It will be less willing to engage in any tacitly collusive conduct in the downstream market and it has a greater incentive to cheat on any collusive arrangement. We show that these effects may dominate input price regulation. A social planner may prefer the upstream monopoly to participate in the downstream market, even if integration leads to a higher regulated input price. The anti-competitive effects of the higher input price are more than offset by the pro-competitive effects of integration.

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Bibliographic Info

Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 767.

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Length: 31 pages
Date of creation: 2000
Date of revision:
Handle: RePEc:mlb:wpaper:767

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Keywords: MONOPOLIES ; GAMES ; PRICES ; MARKET;

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References

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  1. McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, vol. 84(1), pages 210-30, March.
  2. Paul Geroski & David Thompson & Saadet Toker, 1989. "Vertical separation and price discrimination: cellular phones in the UK," Fiscal Studies, Institute for Fiscal Studies, vol. 10(4), pages 83-103, November.
  3. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, December.
  4. de Fontenay, C. & Gans, J.S., 1999. "Extending Market Power through Vertical Integration," Papers 99/2, New South Wales - School of Economics.
  5. Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Wiley Blackwell, vol. 38(113), pages 1-12, January.
  6. Economides, Nicholas, 1998. "The incentive for non-price discrimination by an input monopolist," International Journal of Industrial Organization, Elsevier, vol. 16(3), pages 271-284, May.
  7. Richard J. Gilbert & Michael H. Riordan, 1995. "Regulating Complementary Products: A Comparative Institutional Analysis," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 243-256, Summer.
  8. Vickers, John, 1995. "Competition and Regulation in Vertically Related Markets," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 1-17, January.
  9. John Vickers & George Yarrow, 1988. "Privatization: An Economic Analysis," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262720116, December.
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