The general complexity of demand interrelationships including the co-existence of complements and substitutes make traditional methods of regulating network industries problematic. Collusive pricing is preferred to independent pricing on complementary sections of a network whilst the reverse is true where goods/services are substitutes. However, the costs of market failure in the context of complementary goods, in particular, make appropriate regulatory involvement in such industries all the more important. In this paper, we explore alternative competitive and regulatory strategies within a simple theoretical network with differentiated demands. We show that the employment of an independent profit-maximising agent may offer a partial solution to the problem of network regulation, yielding outcomes which involve all parties pursuing their own interests yet being desirable to both firms and a welfare-maximising social planner.
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Paper provided by The University of Sheffield, Department of Economics in its series Working Papers with number
2007004.
Find related papers by JEL classification: D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets R48 - Urban, Rural, and Regional Economics - - Transportation Systems - - - Government Pricing; Regulatory Policies
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