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Vertical Integration and Sabotage with a Regulated Bottleneck Monopoly

Author

Listed:
  • 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.

Suggested Citation

  • 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.
    • Handle: RePEc:bpj:bejeap:v:9:y:2009:i:1:n:35
    DOI: 10.2202/1935-1682.2172
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    1. 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.
    2. 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.
    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. Kondaurova, Irina & Weisman, Dennis L., 2003. "Incentives for non-price discrimination," Information Economics and Policy, Elsevier, vol. 15(2), pages 147-171, June.
    5. 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, September.
    6. 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 157-172, March.
    7. 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.
    8. Sand, Jan Y., 2004. "Regulation with non-price discrimination," International Journal of Industrial Organization, Elsevier, vol. 22(8-9), pages 1289-1307, November.
    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. 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, February.
    11. 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.
    12. Federico Mini, 2001. "The Role of Incentives for Opening Monopoly Markets: Comparing GTE and BOC Cooperation with Local Entrants," Journal of Industrial Economics, Wiley Blackwell, vol. 49(3), pages 379-414, September.
    13. Weisman, Dennis L, 1995. "Regulation and the Vertically Integrated Firm: The Case of RBOC Entry into Interlata Long Distance," Journal of Regulatory Economics, Springer, vol. 8(3), pages 249-266, November.
    14. 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.
    15. David Sappington, 2005. "Regulating Service Quality: A Survey," Journal of Regulatory Economics, Springer, vol. 27(2), pages 123-154, November.
    16. repec:bla:jindec:v:48:y:2000:i:3:p:253-86 is not listed on IDEAS
    17. Weisman, Dennis L., 2001. "Access pricing and exclusionary behavior," Economics Letters, Elsevier, vol. 72(1), pages 121-126, July.
    18. 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.
    19. 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.
    20. David Reiffen & Laurence Schumann & Michael R. Ward, 2000. "Discriminatory Dealing with Downstream Competitors: Evidence from the Cellular Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 48(3), pages 253-286, September.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. 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.
    2. 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, September.
    3. 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.
    4. Alexandra Lai & Nikil Chande & Sean O'Connor, 2006. "Credit in a Tiered Payments System," Staff Working Papers 06-36, Bank of Canada.
    5. 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.
    6. 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.
    7. 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.
    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. 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, The University of Osaka.
    10. Alexandra Lai & Nikil Chande & Sean O'Connor, 2006. "Credit in a Tiered Payments System," Staff Working Papers 06-36, Bank of Canada.
    11. 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.
    12. Palacios M., Sebastián & Saavedra P., Eduardo, 2017. "Alternative policies for the liberalization of retail electricity markets in Chile," Utilities Policy, Elsevier, vol. 49(C), pages 72-92.
    13. Karp, Larry S. & Perloff, Jeffrey M., 2011. "The iPhone goes downstream: mandatory universal distribution," CUDARE Working Papers 123636, University of California, Berkeley, Department of Agricultural and Resource Economics.
    14. 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.
    15. David Mandy & David Sappington, 2007. "Incentives for sabotage in vertically related industries," Journal of Regulatory Economics, Springer, vol. 31(3), pages 235-260, June.
    16. David Sappington & Dennis Weisman, 2005. "Self-Sabotage," Journal of Regulatory Economics, Springer, vol. 27(2), pages 155-175, November.
    17. 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.
    18. 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.
    19. David Sappington, 2005. "Regulating Service Quality: A Survey," Journal of Regulatory Economics, Springer, vol. 27(2), pages 123-154, November.
    20. Debashis Pal & David Sappington & Ying Tang, 2012. "Sabotaging cost containment," Journal of Regulatory Economics, Springer, vol. 41(3), pages 293-314, June.

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