Vertical Integration and Sabotage with a Regulated Bottleneck Monopoly

Centro de Economía de la Empresa Working Paper No. 9

46 Pages Posted: 11 Mar 2008

See all articles by Álvaro E. Bustos

Álvaro E. Bustos

Pontificia Universidad Catolica de Chile

Alexander Galetovic

Universidad Adolfo Ibáñez; Stanford University - The Hoover Institution on War, Revolution and Peace; University of Padua - CRIEP

Date Written: March 2008

Abstract

In this paper we systematically study the vertical integration and sabotage decisions of a regulated bottleneck monopoly that sells access to independent downstream firms. Our results reconciliate a set of seemingly contradictory findings of the literature. We show that unless the monopoly's subsidiary is implausible more efficient than the independent firms, vertical integration never benefits consumers. Moreover, sabotage may prompt inefficient vertical integration. In addition, we show that the intensity of sabotage either depends on a relation between the market share of the subsidiary and the elasticity of the derived demand for access or a standard Lerner condition augmented by the direct cost of sabotage. More specifically, if the subsidiary and independent firms coexist in equilibrium, then the intensity of sabotage increases with the subsidiary's size and the intensity of economies of scope but if the monopoly optimally excludes rivals then intensity of sabotage decreases on these same parameters.

Keywords: bottleneck monopoly, sabotage, vertical integration, free entry, welfare

JEL Classification: L12, L22, L51

Suggested Citation

Bustos, Álvaro E. and Galetovic, Alexander, Vertical Integration and Sabotage with a Regulated Bottleneck Monopoly (March 2008). Centro de Economía de la Empresa Working Paper No. 9. Available at SSRN: https://ssrn.com/abstract=1104036 or http://dx.doi.org/10.2139/ssrn.1104036

Álvaro E. Bustos

Pontificia Universidad Catolica de Chile ( email )

Vicuna Mackena 4860. Macul
Santiago
Chile

HOME PAGE: http://https://sites.google.com/site/20bustos13/

Alexander Galetovic (Contact Author)

Universidad Adolfo Ibáñez ( email )

Peñalolén
Santiago
Chile

Stanford University - The Hoover Institution on War, Revolution and Peace ( email )

Stanford, CA 94305-6010
United States

University of Padua - CRIEP ( email )

Padua
Italy

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