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Legal Unbundling Can Be a Golden Mean between Vertical Integration and Separation

Felix Höffler

WHU - Otto Beisheim School of Management

Sebastian Kranz

University of Ulm

December 1, 2007

Bonn Econ Discussion Paper No. 15/2007

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.

Number of Pages in PDF File: 35

Keywords: Network industries, regulation, vertical relations, investments, ownership, sabotage

JEL Classification: D2, D4, L1, L42, L43, L51

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Date posted: December 7, 2007 ; Last revised: April 7, 2008

Suggested Citation

Höffler, Felix and Kranz, Sebastian, Legal Unbundling Can Be a Golden Mean between Vertical Integration and Separation (December 1, 2007). Bonn Econ Discussion Paper No. 15/2007. Available at SSRN: http://ssrn.com/abstract=1066461 or http://dx.doi.org/10.2139/ssrn.1066461

Contact Information

Felix Höffler
WHU - Otto Beisheim School of Management ( email )
Burgplatz 2
Vallendar, 56179
Sebastian Kranz (Contact Author)
University of Ulm ( email )
Ulm, D-89081
HOME PAGE: http://www.uni-ulm.de/mawi/mawi-wiwi/mitarbeiter/skranz.html
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