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Integration and Separation with Costly Demand Information

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  • Elisabetta Iossa
  • Francesca Stroffolini

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Abstract

We consider an industry characterized by a regulated natural monopoly in the upstream market and Cournot competition with demand uncertainty in the unregulated downstream market. The realization of demand cannot be observed by the regulator, whilst it can be privately observed at some cost by the upstream monopolist. Information acquisition is also unobservable. We study whether it is better to allow the monopolist to operate in the downstream market (integration) or instead to exclude it (separation). We show that asymmetric information on demand favours separation but unobservability of information acquisition favours integration.

Suggested Citation

  • Elisabetta Iossa & Francesca Stroffolini, 2007. "Integration and Separation with Costly Demand Information," The Centre for Market and Public Organisation 07/167, Department of Economics, University of Bristol, UK.
  • Handle: RePEc:bri:cmpowp:07/167
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    File URL: http://www.bris.ac.uk/Depts/CMPO/workingpapers/wp167.pdf
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    References listed on IDEAS

    as
    1. Esther Hauk & Sjaak Hurkens, 2001. "Secret information acquisition in Cournot markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 18(3), pages 661-681.
    2. Elisabetta Iossa & Patrick Legros, 2004. "Auditing and Property Rights," RAND Journal of Economics, The RAND Corporation, vol. 35(2), pages 356-372, Summer.
    3. Cremer, Jacques & Khalil, Fahad & Rochet, Jean-Charles, 1998. "Contracts and Productive Information Gathering," Games and Economic Behavior, Elsevier, vol. 25(2), pages 174-193, November.
    4. Dimitrova, Magdalena & Schlee, Edward E., 2003. "Monopoly, competition and information acquisition," International Journal of Industrial Organization, Elsevier, vol. 21(10), pages 1623-1642, December.
    5. David M Newbery, 2002. "Regulating Unbundled Network Utilities," The Economic and Social Review, Economic and Social Studies, vol. 33(1), pages 23-41.
    6. Hurkens, Sjaak & Vulkan, Nir, 2001. "Information acquisition and entry," Journal of Economic Behavior & Organization, Elsevier, vol. 44(4), pages 467-479, April.
    7. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
    8. Iossa, Elisabetta & Stroffolini, Francesca, 2002. "Price cap regulation and information acquisition," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 1013-1036, September.
    9. Severin Borenstein, 2002. "The Trouble With Electricity Markets: Understanding California's Restructuring Disaster," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 191-211, Winter.
    10. John Vickers, 1995. "Competition and Regulation in Vertically Related Markets," Review of Economic Studies, Oxford University Press, vol. 62(1), pages 1-17.
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    Cited by:

    1. Francesca Stroffolini, 2008. "Access Price Cap Mechanisms and Industry Structure with Information Acquisition," CSEF Working Papers 193, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

    More about this item

    Keywords

    Information acquisition; liberalization and separation;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L5 - Industrial Organization - - Regulation and Industrial Policy

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