Advertisement

Journal of Regulatory Economics

, Volume 41, Issue 2, pp 201–215 | Cite as

Bottleneck co-ownership as a regulatory alternative

  • Federico Boffa
  • John Panzar
Original Article

Abstract

This paper proposes a regulatory mechanism for vertically related industries in which the upstream “bottleneck” segment faces significant returns to scale while other (downstream) segments may be more competitive. In the proposed mechanism, the ownership of the upstream firm is allocated to downstream firms in proportion to their shares of input purchases. This mechanism, while preserving downstream competition, partially internalizes the benefits of exploiting economies of scale resulting from an increase in downstream output. We show that this mechanism is more efficient than a disintegrated market structure in which the upstream natural monopoly bottleneck sets a price equal to average cost.

Keywords

Regulation Vertically related industries Co-ownership 

JEL Classification

L22 L51 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Armstrong M., Sappington D. (2006) Regulation, competition and liberalization. Journal of Economic Literature 44: 325–366CrossRefGoogle Scholar
  2. Baron D., Myerson R. (1982) Regulating a monopolist with unknown costs. Econometrica 50: 911–930CrossRefGoogle Scholar
  3. Beard T. R., Kaserman D., Mayo J. (2001) Regulation, vertical integration and sabotage. Journal of Industrial Economics 49: 319–333CrossRefGoogle Scholar
  4. Boffa, F., & Lynne K. (2008). Network regulation through ownership structure: An application to the electric power industry. mimeo.Google Scholar
  5. Bresnahan T., Salop S. (1986) Quantifying the competitive effects of production joint ventures. International Journal of Industrial Organization 4: 155–175CrossRefGoogle Scholar
  6. California Public Utilities Commission Communications Division—Policy Branch, Staff White Paper. (2008). Market share analysis of residential voice communication in California.Google Scholar
  7. Crew M., Kleindorfer P., Sumpter J. (2004) Bringing competition in telecommunications by divesting the RBOCs. In: Crew M. A., Spiegel M. (eds) Obtaining the best from regulation and competition. Kluwer Academic Publishers, BostonGoogle Scholar
  8. Demsetz H. (1968) Why regulate utilities. Journal of Law and Economics 11: 55–65CrossRefGoogle Scholar
  9. Fjell K., Foros O., Pal D. (2010) Endogenous average cost based access pricing. Review of Industrial Organization 36: 149–162CrossRefGoogle Scholar
  10. Friedman J. (1971) A non-cooperative equilibrium for supergames. Review of Economic Studies 28: 1–12CrossRefGoogle Scholar
  11. Gayle P. (2008) An empirical analysis of the competitive effects of the delta/continental/northwest code-share alliance. Journal of Law and Economics 51: 743–770CrossRefGoogle Scholar
  12. Gilbert R., Riordan M. (1995) Regulating complementary products: A comparative institutional analysis. Rand Journal of Economics 26: 243–256CrossRefGoogle Scholar
  13. Kogut B. (1988) Joint ventures: Theoretical and empirical perspectives. Strategic Management Journal 9: 319–332CrossRefGoogle Scholar
  14. Kuhn K.-U., Vives X. (1999) Excess entry, vertical integration, and welfare. Rand Journal of Economics 30: 575–603CrossRefGoogle Scholar
  15. Laffont J.-J., Tirole J. (1993) A theory of incentives in procurement and regulation. MIT Press, Cambridge, MAGoogle Scholar
  16. Lee S. H., Hamilton J. (1999) Using market structure to regulate a vertically integrated monopolist. Journal of Regulatory Economics 15: 223–248CrossRefGoogle Scholar
  17. Loeb M., Magat W. (1979) A decentralized method for utility regulation. Journal of Law and Economics 22: 399–404CrossRefGoogle Scholar
  18. Park Y.-S., Ahn B.-H. (1999) Joint ownership and interconnection pricing in network industries. International Review of Economics and Finance 8: 183–198CrossRefGoogle Scholar
  19. Sappington D. (1983) Optimal regulation of a multiproduct monopoly with unknown technological capabilities. Bell Journal of Economics 14: 453–463CrossRefGoogle Scholar
  20. Spengler J. (1950) Vertical integration and antitrust policy. Journal of Political Economy 58: 347–352CrossRefGoogle Scholar
  21. Spulber D. (1989) Regulation and markets. MIT Press, Cambridge, MAGoogle Scholar
  22. Vickers J. (1995) Competition and regulation in vertically related markets. Review of Economic Studies 62: 1–17CrossRefGoogle Scholar
  23. Vives X. (1999) Oligopoly pricing. MIT Press, Cambridge, MAGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  1. 1.Department of Legal and Economic StudiesUniversity of MacerataJesiItaly
  2. 2.Department of EconomicsUniversity of AucklandAucklandNew Zealand
  3. 3.Department of EconomicsNorthwestern UniversityEvanstonUSA

Personalised recommendations