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Incentives for Sabotage in Vertically Related Industries

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Abstract

We show that the incentives a vertically integrated supplier may have to disadvantage or "sabotage" the activities of downstream rivals vary with both the type of sabotage and the nature of downstream competition. Cost-increasing sabotage is typically profitable under both Cournot and Bertrand competition. In contrast, demand-reducing sabotage is often profitable under Cournot competition, but unprofitable under Bertrand competition. Incentives for sabotage can vary non-monotonically with the degree of product differentiation.

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File URL: http://economics.missouri.edu/working-papers/2004/wp0404_mandy.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Missouri in its series Working Papers with number 0404.

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Length: 39 pgs.
Date of creation: 16 Dec 2004
Date of revision: 16 Dec 2004
Publication status: Forthcoming in Journal of Regulatory Economics (2006)
Handle: RePEc:umc:wpaper:0404

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Keywords: Regulation; Vertical Integration; Access Pricing; Sabotage;

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References

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  1. 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.
  2. Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-22, February.
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  5. Weisman, Dennis L & Kang, Jaesung, 2001. "Incentives for Discrimination when Upstream Monopolists Participate in Downstream Markets," Journal of Regulatory Economics, Springer, vol. 20(2), pages 125-39, September.
  6. Reiffen, David, 1998. "A Regulated Firm's Incentive to Discriminate: A Reevaluation and Extension of Weisman's Result," Journal of Regulatory Economics, Springer, vol. 14(1), pages 79-86, July.
  7. Bustos Alvaro E & Galetovic Alexander, 2009. "Vertical Integration and Sabotage with a Regulated Bottleneck Monopoly," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-52, September.
  8. David Sappington, 2006. "On the Merits of Vertical Divestiture," Review of Industrial Organization, Springer, vol. 29(3), pages 171-191, November.
  9. Vives, X., 1988. "Nash Equilibrium With Strategic Complementarities," UFAE and IAE Working Papers 107-88, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
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  11. Dennis Weisman & Michael Williams, 2001. "The Costs and Benefits of Long-Distance Entry: Regulation and Non-Price Discrimination," Review of Industrial Organization, Springer, vol. 18(3), pages 275-282, May.
  12. Foros, Oystein & Kind, Hans Jarle & Sorgard, Lars, 2002. "Access Pricing, Quality Degradation, and Foreclosure in the Internet," Journal of Regulatory Economics, Springer, vol. 22(1), pages 59-83, July.
  13. 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.
  14. Sibley, David S. & Weisman, Dennis L., 1998. "Raising rivals' costs: The entry of an upstream monopolist into downstream markets," Information Economics and Policy, Elsevier, vol. 10(4), pages 451-470, December.
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  17. Mandy, David M, 2000. "Killing the Goose That May Have Laid the Golden Egg: Only the Data Know Whether Sabotage Pays," Journal of Regulatory Economics, Springer, vol. 17(2), pages 157-72, March.
  18. Hinton, Paul J, et al, 1998. "An Analysis of the Welfare Effects of Long-Distance Market Entry by an Integrated Access and Long-Distance Provider," Journal of Regulatory Economics, Springer, vol. 13(2), pages 183-96, March.
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Citations

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Cited by:
  1. Alessandro Avenali & Giorgio Matteucci & Pierfrancesco Reverberi, 2010. "How does vertical industry structure affect investment in infrastructure quality?," DIS Technical Reports 2010-08, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza".
  2. Michiel Bijlsma & Viktoria Kocsis & Victoria Shestalova & Gijsbert Zwart, 2008. "Vertical foreclosure: a policy framework," CPB Document 157, CPB Netherlands Bureau for Economic Policy Analysis.
  3. Schober, Dominik, 2013. "Static vs. dynamic impacts of unbundling: Electricity markets in South America," ZEW Discussion Papers 13-033, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  4. David Sappington, 2006. "Regulation in Vertically-Related Industries: Myths, Facts, and Policy," Review of Industrial Organization, Springer, vol. 28(1), pages 3-16, 02.
  5. David Sappington & Dennis Weisman, 2005. "Self-Sabotage," Journal of Regulatory Economics, Springer, vol. 27(2), pages 155-175, November.
  6. Nikogosian, Vigen & Veith, Tobias, 2011. "Vertical integration, separation and non-price discrimination: An empirical analysis of German electricity markets for residential customers," ZEW Discussion Papers 11-069, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  7. Debashis Pal & David Sappington & Ying Tang, 2012. "Sabotaging cost containment," Journal of Regulatory Economics, Springer, vol. 41(3), pages 293-314, June.
  8. Höffler, Felix & Kranz, Sebastian, 2011. "Legal unbundling can be a golden mean between vertical integration and ownership separation," International Journal of Industrial Organization, Elsevier, vol. 29(5), pages 576-588, September.
  9. Stefan Buehler & Dennis Gärtner & Daniel Halbheer, 2006. "Deregulating Network Industries: Dealing with Price-quality Tradeoffs," Journal of Regulatory Economics, Springer, vol. 30(1), pages 99-115, 07.
  10. Hervas-Drane, Andres, 2011. "Non-cost-raising discrimination: A rationale for functional separation in broadband open access," IESE Research Papers D/942, IESE Business School.
  11. Toshihiro Matsumura & Noriaki Matsushima, 2012. "Regulated Input Price, Vertical Separation, and Leadership in Free Entry Markets," ISER Discussion Paper 0853, Institute of Social and Economic Research, Osaka University.
  12. Mark A. Jamison, 2004. "Effects of Industry Concentration on Quality Choices for Network Connectivity," Working Papers 04-08, NET Institute.
  13. Foros, Øystein & Kind, Hans Jarle & Sand, Jan Yngve, 2009. "Entry may increase network providers' profit," Telecommunications Policy, Elsevier, vol. 33(9), pages 486-494, October.
  14. Isabel Soares & Paula Sarmento, 2012. "Unbundling in the Telecommunications and the Electricity Sectors: How Far should it Go?," European Research Studies Journal, European Research Studies Journal, vol. 0(Special I), pages 157-194.
  15. Felix Höffler & Sebastian Kranz, 2007. "Imperfect Legal Unbundling of Monopolistic Bottlenecks," Bonn Econ Discussion Papers bgse16_2007, University of Bonn, Germany.
  16. David Sappington & J. Sidak, 2003. "Incentives for Anticompetitive Behavior by Public Enterprises," Review of Industrial Organization, Springer, vol. 22(3), pages 183-206, May.
  17. Mattos, César, 2009. "Open access policies, regulated charges and non-price discrimination in telecommunications," Information Economics and Policy, Elsevier, vol. 21(4), pages 253-260, November.
  18. Viktória Kocsis & Paul Bijl, 2007. "Network neutrality and the nature of competition between network operators," International Economics and Economic Policy, Springer, vol. 4(2), pages 159-184, August.
  19. David Sappington, 2005. "Regulating Service Quality: A Survey," Journal of Regulatory Economics, Springer, vol. 27(2), pages 123-154, November.

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