Imperfect Legal Unbundling of Monopolistic Bottlenecks

Felix Höffler, Sebastian Kranz
2007 Social Science Research Network  
We study an industry with a monopolistic bottleneck supplying an essential input to several downstream firms. Under legal unbundling the bottleneck must be operated by a legally independent upstream firm, which may be partly or fully owned by an incumbent active in downstream markets. Access prices are regulated but the upstream firm can perform non-tariff discrimination. Under perfect legal unbundling the upstream firm maximizes only own profits; with imperfections it is biased and to some
more » ... sed and to some extent accounts also for the incumbent's downstream profits. We show that increasing the incumbent's ownership share increases total output if the upstream firm's bias is sufficiently small, while otherwise effects are ambiguous. Stronger regulation that reduces the bias without changing ownership shares generally increases total output. We also endogenize the bias and show that it can depend non-monotonically on the ownership share.
doi:10.2139/ssrn.1068802 fatcat:3agvzv6gyvejtoopikkanz4bme