, Volume 4, Issue 3, pp 279-287

Upstream vertical integration with automatic price adjustments

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Abstract

Regulators often must decide whether they should allow a utility to vertically integrate. The relevant policy concerns are whether vertical integration might allow the utility to increase its downstream price and what, if any, additional constraints must be placed on the utility to prevent potential price increases. The extant literature provides regulators little guidance, and this paper fills the void by providing an analysis of the effects of upstream vertical integration by a regulated firm. The paper considers integration into the production of an intermediate input for which the price is automatically passed through to downstream customers. It demonstrates that vertical integration can result in higher downstream prices and greater profit for the utility whenever regulators imperfectly monitor input prices.