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Bottleneck co-ownership as a regulatory alternative

  • Federico Boffa

    ()

  • John Panzar

    ()

This paper proposes a regulatory mechanism for vertically related industries in which the upstream “bottleneck” segment faces significant returns to scale while other (downstream) segments may be more competitive. In the proposed mechanism, the ownership of the upstream firm is allocated to downstream firms in proportion to their shares of input purchases. This mechanism, while preserving downstream competition, partially internalizes the benefits of exploiting economies of scale resulting from an increase in downstream output. We show that this mechanism is more efficient than a disintegrated market structure in which the upstream natural monopoly bottleneck sets a price equal to average cost.

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File URL: http://hdl.handle.net/10.1007/s11149-011-9157-0
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Article provided by Springer in its journal Journal of Regulatory Economics.

Volume (Year): 41 (2012)
Issue (Month): 2 (April)
Pages: 201-215

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Handle: RePEc:kap:regeco:v:41:y:2012:i:2:p:201-215
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100298

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  1. Philip G. Gayle, 2008. "An Empirical Analysis of the Competitive Effects of the Delta/Continental/Northwest Code-Share Alliance," Journal of Law and Economics, University of Chicago Press, vol. 51(4), pages 743-766, November.
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  8. 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.
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  10. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58, pages 347.
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