Rent Extraction by an Unregulated essential Facility
This paper shows that a regulator should be careful when regulating a final product which industry is characterized by an unregulated essential facility sold through non-linear tariffs. Two regulatory environments are considered: the Laffont-Tirole framework with exogenous public funds and the Ramsey-Boiteux setting with a unique budget constraint over all the regulated activities. In both cases, the upstream monopoly obtains greater profits when there is regulation than when there is not, i.e. when the upstream monopoly deals directly with the downstream firm. Therefore, if it has this opportunity, the regulator chooses not to regulate the downstream firm in order to linit this rent extraction.
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