Vertical Integration and Sabotage in Regulated Industries

Universidad de Chile Center for Applied Economics Working Paper No. 164

44 Pages Posted: 3 Dec 2003 Last revised: 4 Sep 2019

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: June 1, 2003

Abstract

An essential facility produces 'access', an essential input used by a competitive downstream industry. The access charge is regulated. The essential facility can vertically integrate into the downstream segment and sabotage rivals increasing their costs.

We systematically study the vertical integration decision and the optimal level of sabotage. Contrary to most of the literature, we allow for free entry into the downstream segment, so that prices equal long-run average costs.

We find the following: First, sabotage does not pay when diseconomies of scope are large, or the subsidiary's market share is small. Second, when sabotage pays, and the subsidiary coexists with rivals in equilibrium, optimal sabotage increases with the subsidiary's market share and scope economies. On the other hand, when the essential facility optimally sabotages to exclude rivals, the intensity of sabotage falls with economies of scope. Third, unless the subsidiary is implausibly more efficient than independent firms, vertical integration never benefits consumers.

Keywords: Essential facility, sabotage, vertical integration

JEL Classification: L12, L22, L51

Suggested Citation

Bustos, Álvaro E. and Galetovic, Alexander, Vertical Integration and Sabotage in Regulated Industries (June 1, 2003). Universidad de Chile Center for Applied Economics Working Paper No. 164. Available at SSRN: https://ssrn.com/abstract=474621 or http://dx.doi.org/10.2139/ssrn.474621

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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