Sunday, January 13, 2008
Posted by D. Daniel Sokol
Felix Hoffler (Max Planck Institute of Research on Collective Goods) and Sebastian Kranz (University of Bonn Department of Economics) discuss Legal Unbundling Can Be a Golden Mean between Vertical Integration and Separation.
ABSTRACT: We study an industry in which an upstream monopolist supplies an essential input at a regulated price to several downstream firms. Legal unbundling means that a downstream firm owns the upstream firm, but this upstream firm is legally independent and maximizes its own upstream profits. We allow for non-tariff discrimination by the upstream firm and show that under quite general conditions legal unbundling yields (weakly) higher quantities in the downstream market than vertical separation and integration. Therefore, typically, consumer surplus will be largest under legal unbundling. Outcomes under legal unbundling are still advantageous when we allow for discriminatory capacity investments, investments into marginal cost reduction and investments into network reliability. If access prices are unregulated, however, legal unbundling may be quite undesirable.