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Vertical Integration and Sabotage with a Regulated Bottleneck Monopoly

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Listed author(s):
  • Bustos Alvaro E

    ()

    (Catholic University of Chile and Northwestern University)

  • Galetovic Alexander

    ()

    (Universidad de los Andes)

Abstract

We study the vertical integration and sabotage decisions of a regulated bottleneck monopoly that sells "access" to independent firms and may own a subsidiary downstream. We extend the literature in four directions by: (i) endogenizing vertical integration and linking it with the intensity of vertical economies or diseconomies à la Kaserman and Mayo (1991); (ii) systematically studying how vertical economies and diseconomies affect the intensity of sabotage; (iii) showing that the intensity of sabotage is determined by either a standard Lerner condition augmented by the direct cost of sabotage or a relation between the market share of the subsidiary and the elasticity of the derived demand for access; and (iv) systematically examining the welfare effect of vertical integration.

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Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 9 (2009)
Issue (Month): 1 (September)
Pages: 1-52

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Handle: RePEc:bpj:bejeap:v:9:y:2009:i:1:n:35
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Find related papers by JEL classification:
  • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
  • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
  • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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  1. Reiffen, David & Schumann, Laurence & Ward, Michael R, 2000. "Discriminatory Dealing with Downstream Competitors: Evidence from the Cellular Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 48(3), pages 253-286, September.
  2. 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.
  3. David Mandy & David Sappington, 2007. "Incentives for sabotage in vertically related industries," Journal of Regulatory Economics, Springer, vol. 31(3), pages 235-260, June.
  4. Sand, Jan Y., 2004. "Regulation with non-price discrimination," International Journal of Industrial Organization, Elsevier, vol. 22(8-9), pages 1289-1307, November.
  5. José Miguel Benavente & Alexander Galetovic & Ricardo Sanhueza & Pablo Serra, 2005. "Estimando la Demanda Residencial por Electricidad en Chile: El Consumo es Sensible al Precio," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 42(125), pages 31-61.
  6. David Sappington, 2006. "Regulation in Vertically-Related Industries: Myths, Facts, and Policy," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 28(1), pages 3-16, 02.
  7. Kondaurova, Irina & Weisman, Dennis L., 2003. "Incentives for non-price discrimination," Information Economics and Policy, Elsevier, vol. 15(2), pages 147-171, June.
  8. 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.
  9. Weisman, Dennis L, 1998. "The Incentive to Discriminate by a Vertically-Integrated Regulated Firm: A Reply," Journal of Regulatory Economics, Springer, vol. 14(1), pages 87-91, July.
  10. Bergman, Mats A., 2000. "A note on N. Economides: the incentive for non-price discrimination by an input monopolist," International Journal of Industrial Organization, Elsevier, vol. 18(6), pages 985-988, August.
  11. David Sappington, 2005. "Regulating Service Quality: A Survey," Journal of Regulatory Economics, Springer, vol. 27(2), pages 123-154, November.
  12. Kaserman, David L & Mayo, John W, 1991. "The Measurement of Vertical Economies and the Efficient Structure of the Electric Utility Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 39(5), pages 483-502, September.
  13. Eduardo M. R. A. Engel & Ronald D. Fischer & Alexander Galetovic, 2004. "How to Auction a Bottleneck Monopoly When Underhand Vertical Agreements are Possible," Journal of Industrial Economics, Wiley Blackwell, vol. 52(3), pages 427-455, 09.
  14. Galetovic Alexander & Sanhueza Ricardo, 2009. "Vertical Mergers and Competition with a Regulated Bottleneck Monopoly," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-20, October.
  15. Reiffen David & Ward Michael R, 2002. "Recent Empirical Evidence on Discrimination by Regulated Firms," Review of Network Economics, De Gruyter, vol. 1(1), pages 1-15, March.
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Cited by:

  1. Bose, Arup & Pal, Debashis & Sappington, David E.M., 2017. "Pricing to preclude sabotage in regulated industries," International Journal of Industrial Organization, Elsevier, vol. 51(C), pages 162-184.
  2. David Mandy & David Sappington, 2007. "Incentives for sabotage in vertically related industries," Journal of Regulatory Economics, Springer, vol. 31(3), pages 235-260, June.
  3. 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.
  4. 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.
  5. 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.
  6. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
  7. Mandy, David M. & Mayo, John W. & Sappington, David E.M., 2016. "Targeting efforts to raise rivals' costs: Moving from “Whether” to “Whom”," International Journal of Industrial Organization, Elsevier, vol. 46(C), pages 1-15.
  8. Karp Larry S. & Perloff Jeffrey M., 2013. "Vertical Contracts and Mandatory Universal Distribution," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 13(2), pages 595-626, October.
  9. Alexander Galetovic, 2003. "Integración Vertical en el Sector Eléctrico: Una guía para el usuario (Vertical integration in the electricity sector)," Documentos de Trabajo 158, Centro de Economía Aplicada, Universidad de Chile.
  10. David Sappington, 2005. "Regulating Service Quality: A Survey," Journal of Regulatory Economics, Springer, vol. 27(2), pages 123-154, November.
  11. Debashis Pal & David Sappington & Ying Tang, 2012. "Sabotaging cost containment," Journal of Regulatory Economics, Springer, vol. 41(3), pages 293-314, June.
  12. Alexandra Lai & Nikil Chande & Sean O'Connor, 2006. "Credit in a Tiered Payments System," Staff Working Papers 06-36, Bank of Canada.
  13. Bruce Owen, 2011. "Antitrust and Vertical Integration in “New Economy” Industries with Application to Broadband Access," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 38(4), pages 363-386, June.
  14. Karp, Larry & Perloff, Jeffrey, 2011. "The iPhone Goes Downstream: Mandatory Universal Distribution∗," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt7vc007jh, Department of Agricultural & Resource Economics, UC Berkeley.
  15. Galetovic Alexander & Sanhueza Ricardo, 2009. "Vertical Mergers and Competition with a Regulated Bottleneck Monopoly," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-20, October.
  16. David Sappington & Dennis Weisman, 2005. "Self-Sabotage," Journal of Regulatory Economics, Springer, vol. 27(2), pages 155-175, November.

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