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
Date Written: March 2008
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: Suggested Citation