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Regulating Complementary Input Supply: Production Cost Correlation and Limited Liability

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  • Jos Jansen

Abstract

We study the optimal regulation of complementary input supply. The regulator chooses for either a monopolist producing two complementary inputs in fixed proportion, or two independent firms producing one input each. Under independent input supply, non-monotonic regulatory schemes become optimal for high correlation between input production costs. The optimal regulatory choice depends on the correlation between costs, and on the producers’ liability structure. Under limited liability monopolistic input supply gives a higher expected welfare whenever the correlation coefficient is sufficiently small and positive. For higher correlation independent input supply is chosen, and the regulatory scheme is non-monotonic in total costs. ZUSAMMENFASSUNG - (Regulierung des Angebots komplementärer Inputs: Korrelation von Produktionskosten und beschränkte Haftung) Dieser Beitrag untersucht die optimale Regulierung des Angebots zweier komplementärer Inputs. Der Regulierer entscheidet sich dabei entweder für einen Monopolisten, der zwei komplementäre Inputs in einem konstanten Verhältnis zu einander produziert oder für zwei unabhängige Firmen, die jeweils einen der Inputs roduzieren. Bei unabhängigem Angebot des Inputs sind nicht monotone Regulierungsverträge optimal für den Fall einer hohen Korrelation zwischen den Produktionskosten der Inputs. Die optimale Regulierungsentscheidung hängt von der Korrelation zwischen Kosten und der Haftungsstruktur des Produzenten ab. Bei beschränkter Haftung führt das Inputangebot durch einen Monopolisten zu einer höheren erwarteten Wohlfahrt, wenn der Korrelationskoeffizient klein genug und positiv ist. Für höhere Korrelation wird das unabhängige Angebot der Inputs gewählt und die Regulierungsverträge sind hinsichtlich der Gesamtkosten nicht monoton.

Suggested Citation

  • Jos Jansen, 1999. "Regulating Complementary Input Supply: Production Cost Correlation and Limited Liability," CIG Working Papers FS IV 99-30, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  • Handle: RePEc:wzb:wzebiv:fsiv99-30
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    Cited by:

    1. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 27, pages 1557-1700, Elsevier.
    2. Sergei Severinov, 2008. "The value of information and optimal organization," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 238-265, March.

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