Thursday, January 14, 2010
Posted by D. Daniel Sokol
Marc Bourreau (Institut Télécom, Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique), Johan Hombert (Centre de Recherche en Économie et Statistique - INSEE - ), Jérôme Pouyet (Department of Economics, Ecole Polytechnique), and Nicolas Schutz (Department of Economics, Ecole Polytechnique) explain Upstream Competition between Vertically Integrated Firms.
ABSTRACT: We propose a model of two-tier competition between vertically integrated firms and unintegrated downstream firms. We show that, even when integrated firms compete in prices to offer a homogeneous input, the Bertrand result may not obtain, and the input may be priced above marginal cost in equilibrium, which is detrimental to consumers' surplus and social welfare. We obtain that these partial foreclosure equilibria are more likely to exist when downstream competition is fierce. We then use our model to assess the impact of several regulatory tools in the telecommunications industry.