Bottleneck co-ownership as a regulatory alternative
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.
KeywordsRegulation Vertically related industries Co-ownership
JEL ClassificationL22 L51
Unable to display preview. Download preview PDF.
- Boffa, F., & Lynne K. (2008). Network regulation through ownership structure: An application to the electric power industry. mimeo.Google Scholar
- California Public Utilities Commission Communications Division—Policy Branch, Staff White Paper. (2008). Market share analysis of residential voice communication in California.Google Scholar
- 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
- Laffont J.-J., Tirole J. (1993) A theory of incentives in procurement and regulation. MIT Press, Cambridge, MAGoogle Scholar
- Spulber D. (1989) Regulation and markets. MIT Press, Cambridge, MAGoogle Scholar
- Vives X. (1999) Oligopoly pricing. MIT Press, Cambridge, MAGoogle Scholar