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Product Differentiation when Competing with the Suppliers of Bottleneck Inputs

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  • Duarte Brito

    ()
    (Universidade Nova de Lisboa)

  • Pedro Pereira

    ()
    (Autoridade da Concorrência)

Abstract

In this article, we analyze the product differentiation decision of a downstream entrant that purchases access to a bottleneck input from one of two vertically integrated incumbents, who will compete with him in the downstream market. We develop a three-stage model, where first an entrant chooses his product, then the entrant negotiates the access price with two incumbents, and finally the firms compete on retail prices. Contrary to what one might expect, both the entrant and the access provider prefer that the entrant chooses a product that is a closer substitute of the product of the access provider than of the product of the other incumbent. This occurs because the access provider interacts with the entrant both in the retail market and the wholesale market. We also consider the cases where both parties, rather than only the incumbents, make the access price offers, where the bargaining stage precedes the location stage, and where there is open access regulation.

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Bibliographic Info

Paper provided by Portuguese Competition Authority in its series Working Papers with number 25.

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Length: 37 pages
Date of creation: Jul 2007
Date of revision:
Handle: RePEc:pca:wpaper:25

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Keywords: Horizontal differentiation; Location; Access price;

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  1. Hinloopen, Jeroen & van Marrewijk, Charles, 1999. "On the limits and possibilities of the principle of minimum differentiation1," International Journal of Industrial Organization, Elsevier, vol. 17(5), pages 735-750, July.
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Cited by:
  1. Brito, Duarte & Pereira, Pedro & Vareda, João, 2012. "Incentives to invest and to give access to non-regulated new technologies," Information Economics and Policy, Elsevier, vol. 24(3), pages 197-211.

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