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Legal vs Ownership Unbundling in Network Industries

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  • Cremer, Helmuth
  • Crémer, Jacques
  • De Donder, Philippe

Abstract

This paper studies the impact of legal unbundling vs ownership unbundling on the incentives of a network operator to invest and maintain its assets. We consider an industry where the upstream firm first chooses the size of a network, while several downstream firms then compete in selling goods and services that use this network as a necessary input. We contrast the (socially) optimal allocation with several equilibrium situations, depending on whether the upstream firm owns zero, one or two downstream firms. The first situation corresponds to ownership unbundling between upstream and downstream parts of the market. As for the other two cases, we equate legal unbundling with the following two assumptions. First, each downstream firm maximizes its own profit, without taking into account any impact on the upstream firm's profit. Second, the upstream firm is not allowed to discriminate between downstream firms by charging different access charges for the use of its network. On the other hand, we assume that the upstream firm chooses its network size in order to maximize its total profit, including the profit of its downstream subsidiaries. Our main results are as follows. Because the investment in the network is not protected, at the time at which it is made, by a contract, the upstream firm will not take into account the interests of its clients when choosing its size. This effect can be mitigated by allowing it to own part of the downstream industry. In other words, ownership separation is more detrimental to welfare than legal unbundling. We also obtain that these results are robust to the introduction of asymmetry in network needs across downstream firms, imperfect downstream competition and downstream investments.
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Suggested Citation

  • Cremer, Helmuth & Crémer, Jacques & De Donder, Philippe, 2006. "Legal vs Ownership Unbundling in Network Industries," IDEI Working Papers 405, Institut d'Économie Industrielle (IDEI), Toulouse.
  • Handle: RePEc:ide:wpaper:5853
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    References listed on IDEAS

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    1. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    2. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
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    Cited by:

    1. Sven Heim, Bastian Krieger, and Mario Liebensteiner, 2020. "Unbundling, Regulation, and Pricing: Evidence from Electricity Distribution," The Energy Journal, International Association for Energy Economics, vol. 0(Special I).
    2. Brito Duarte & Pereira Pedro & Vareda João, 2012. "Does Vertical Separation Necessarily Reduce Quality Discrimination and Increase Welfare?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-44, November.
    3. Bolle, Friedel & Breitmoser, Yves, 2006. "On the Allocative Efficiency of Ownership Unbundling," Discussion Papers 255, European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics.
    4. Raffaele Fiocco, 2012. "Competition and regulation with product differentiation," Journal of Regulatory Economics, Springer, vol. 42(3), pages 287-307, December.
    5. Höffler, Felix & Kranz, Sebastian, 2011. "Legal unbundling can be a golden mean between vertical integration and ownership separation," International Journal of Industrial Organization, Elsevier, vol. 29(5), pages 576-588, September.
    6. Tsatsos, Aristidis, 2012. "Die Liberalisierung des russischen Gassektors: 3 Szenarios? [The liberalisation of the Russian gas sector: 3 scenarios?]," MPRA Paper 44623, University Library of Munich, Germany.
    7. Tangerås, Thomas P., 2012. "Optimal transmission regulation of an integrated energy market," Energy Economics, Elsevier, vol. 34(5), pages 1644-1655.
    8. Ray REES & Sebastian SCHOLZ, 2010. "Electricity Market Design for Germany," Sosyoekonomi Journal, Sosyoekonomi Society, issue 2010-EN.
    9. Benjamin Pakula & Georg Götz, 2011. "Organisational Structures in Network Industries – An Application to the Railway Industry," MAGKS Papers on Economics 201109, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    10. Felix Höffler & Sebastian Kranz, 2011. "Imperfect legal unbundling of monopolistic bottlenecks," Journal of Regulatory Economics, Springer, vol. 39(3), pages 273-292, June.
    11. B. Willems & E. Ehlers, 2008. "Cross-Subsidies in the Electricity Sector," Competition and Regulation in Network Industries, Intersentia, vol. 9(3), pages 201-228, September.
    12. repec:ers:journl:v:xv:y:2012:i:sie:p:157-194 is not listed on IDEAS
    13. Nardi, Paolo, 2012. "Transmission network unbundling and grid investments: Evidence from the UCTE countries," Utilities Policy, Elsevier, vol. 23(C), pages 50-58.
    14. Russell Pittman, 2007. "Make or buy on the Russian railway? Coase, Williamson, and Tsar Nicholas II," Economic Change and Restructuring, Springer, vol. 40(3), pages 207-221, September.
    15. Heim, Sven & Krieger, Bastian & Liebensteiner, Mario, 2018. "Unbundling, regulation and pricing: Evidence from electricity distribution," ZEW Discussion Papers 18-050, ZEW - Leibniz Centre for European Economic Research.
    16. Pollitt, Michael, 2008. "The arguments for and against ownership unbundling of energy transmission networks," Energy Policy, Elsevier, vol. 36(2), pages 704-713, February.
    17. Elena Argentesi & Albert Banal-Estanol & Jo Seldeslachts & Meagan Andrews, 2017. "A Retrospective Evaluation of the GDF/Suez Merger: Effects on Gas Hub Prices," Discussion Papers of DIW Berlin 1664, DIW Berlin, German Institute for Economic Research.
    18. Höffler, Felix & Kranz, Sebastian, 2007. "Legal Unbundling can be a Golden Mean between Vertical Integration and Separation," Bonn Econ Discussion Papers 15/2007, University of Bonn, Bonn Graduate School of Economics (BGSE).
    19. Isabel Soares & Paula Sarmento, 2012. "Unbundling in the Telecommunications and the Electricity Sectors: How Far should it Go?," European Research Studies Journal, European Research Studies Journal, vol. 0(4), pages 157-194.
    20. Bastian Henze & Charles Noussair & Bert Willems, 2012. "Regulation of network infrastructure investments: an experimental evaluation," Journal of Regulatory Economics, Springer, vol. 42(1), pages 1-38, August.
    21. Ibarra-Yunez, Alejandro, 2015. "Energy reform in Mexico: Imperfect unbundling in the electricity sector," Utilities Policy, Elsevier, vol. 35(C), pages 19-27.
    22. Growitsch, Christian & Müller, Gernot & Stronzik, Marcus, 2008. "Ownership Unbundling in der Gaswirtschaft: Theoretische Grundlagen und empirische Evidenz," WIK Discussion Papers 308, WIK Wissenschaftliches Institut für Infrastruktur und Kommunikationsdienste GmbH.
    23. Nikogosian, Vigen & Veith, Tobias, 2011. "Vertical integration, separation and non-price discrimination: An empirical analysis of German electricity markets for residential customers," ZEW Discussion Papers 11-069, ZEW - Leibniz Centre for European Economic Research.

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    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities

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