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Regulated Input Price, Vertical Separation, and Leadership in Free Entrymarkets

22 Pages Posted: 15 Aug 2012  

Toshihiro Matsumura

University of Tokyo - Institute of Social Science

Noriaki Matsushima

Osaka University - Institute of Social and Economic Research (ISER)

Date Written: August 15, 2012

Abstract

We examine incentives of bottleneck facility holders to manipulate access charge accounting in free entry downstream markets. We consider the situation wherein one firm holds an upstream bottleneck facility and new entrants use it at the regulated price (access fee) to provide final products. The bottleneck facility holder affects the regulated input price. We investigate how vertical separation affects the incentive for manipulation and the resulting input price. We find that the results depend on whether the incumbent is the Stackelberg leader in the product market. If the incumbent cannot take leadership in the product market and faces Cournot competition, vertical separation reduces the incentive for manipulation and the resulting input price. The opposite result is derived when the incumbent can take leadership in the product market.

Keywords: network industry, access charge, manipulation of accounting, regulation

JEL Classification: L51, L13

Suggested Citation

Matsumura, Toshihiro and Matsushima, Noriaki, Regulated Input Price, Vertical Separation, and Leadership in Free Entrymarkets (August 15, 2012). ISER Discussion Paper No. 853. Available at SSRN: https://ssrn.com/abstract=2129584 or http://dx.doi.org/10.2139/ssrn.2129584

Toshihiro Matsumura

University of Tokyo - Institute of Social Science ( email )

Hongo 7-3-1
Tokyo, TOKYO 113-0033
Japan

Noriaki Matsushima (Contact Author)

Osaka University - Institute of Social and Economic Research (ISER) ( email )

6-1 Mihogaoka
Ibaraki, Osaka 567-0047
Japan

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