Access Price Cap Mechanisms and Industry Structure with Information Acquisition
This paper considers a network industry characterized by an upstream natural monopoly with cost uncertainty, regulated through an access price mechanism, and an unregulated downstream market with Cournot competition. The upstream monopolist can acquire information on the upstream cost while the information acquisition is prohibitively costly for the regulator and downstream firms. The information acquisition is also unobservable. I investigate how the presence of costly and socially valuable information on the upstream cost affects the desirability of allowing the upstream monopolist to produce in the downstream market (integration) rather than excluding it (separation). I show that when the upstream monopolist is regulated only through an access price cap, the information acquisition problem provides an argument in favour of vertical integration. However, when the regulator also obliges the upstream monopolist to share her access profits with consumers, a bias emerges in favour of separation via the impact of the access-profit sharing plan on the upstream monopolist's incentives to transmit information to her rival in the downstream market.
|Date of creation:||01 Jan 2008|
|Date of revision:|
|Publication status:||Published in Rivista di Politica Economica, 2009, issue 1, pp. 209-247|
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- 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.
- Elisabetta Iossa & Francesca Stroffolini, 2007. "Integration and Separation with Costly Demand Information," CSEF Working Papers 170, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
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97.468, Toulouse - GREMAQ.
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- Cremer, J. & Khalil, F. & Rochet, J-C., 1997. "Contracts and productive information gathering," Discussion Paper Series In Economics And Econometrics 9707, Economics Division, School of Social Sciences, University of Southampton.
- Khalil, F & Rochet, J-C, 1997. "Contracts and Productive Information Gathering," Discussion Papers in Economics at the University of Washington 97-16, Department of Economics at the University of Washington.
- Laffont, Jean-Jacques & Tirole, Jean, 1996. "Creating Competition through Interconnection: Theory and Practice," Journal of Regulatory Economics, Springer, vol. 10(3), pages 227-56, November.
- Iossa, Elisabetta & Stroffolini, Francesca, 2002. "Price cap regulation and information acquisition," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 1013-1036, September.
- Armstrong, Mark, 2001. "The theory of access pricing and interconnection," MPRA Paper 15608, University Library of Munich, Germany.
- Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
- Dov Fried, 1984. "Incentives for Information Production and Disclosure in a Duopolistic Environment," The Quarterly Journal of Economics, Oxford University Press, vol. 99(2), pages 367-381.
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