Bottleneck Access with Structural Regulation and Endogenous Competition

Abstract

In a simple model of network industry, where an upstream monopolis t provides an essential input for downstream service supply, we analyze the competitive settings arising in the downstream market under alternative regulatory frameworks; we combine structural (i.e. vertical integration, functional/ownershipseparation) and conduct (discriminatory and nondiscriminatory access) regulatory remedies. Downstream firms are characterized by different levels of cost effciency in the provision of the service. We show that the degree of heterogeneity in firms’ cost effciency is critical to the determination of the amount of competition that emerges in the downstream market, and of the effciency of the industry. We show that i) when downstream firms are significantly heterogenous, discriminatory access fees may be socially desirable and ii) vertical integration is always socially preferable.

Keywords: Vertical Integration, Functional Separation, Ownership Separation, Regulation, Discriminatory Access Fees

JEL Classification: L13, L22, L4