Regulating a Multi-Utility Firm
30 Pages Posted: 1 Oct 2007
Date Written: September 2007
We study the regulation of a multi-utility, i.e. a utility firm that is also active in a competitive, unregulated sector. If the firm conducts its activities in the two markets jointly, it enjoys economies of scope whose magnitude is the firm's private information, unknown either to the regulator or to the rival firms. We characterize the unregulated market outcome (with price and quantity competition) and optimal regulation that involves an informational externality to the multi-utility's rivals.
Although joint conduct of multi-utility's activities generates scope economies, it also brings private information to the multi-utility, so that regulation is less efficient and the unregulated market too may be adversely affected. Nevertheless, we show that allowing the multi-utility to integrate productions is (socially) desirable, unless joint production is characterized by dis-economies of scope.
Keywords: Regulation, Competition, Asymmetric Information, Multi-utility, Scope economies, Informational externality
JEL Classification: L51, L43, L52
Suggested Citation: Suggested Citation