Vertical Mergers and Competition with a Regulated Bottleneck Monopoly

CEA Working Paper No. 181

24 Pages Posted: 7 Mar 2004

See all articles by Alexander Galetovic

Alexander Galetovic

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

Ricardo Sanhueza

Universidad de los Andes, Chile - School of Economics and Managerial Sciences

Date Written: March 2004

Abstract

Consider a bottleneck monopoly whose access charge is regulated above marginal cost and provides access to an oligopoly of downstream firms. Should the monopolist be allowed to vertically integrate into the downstream market? For the general run of oligopolistic market structures, we show that a vertical merger (or any set of vertical restraints that eliminates the externalities between the upstream and the downstream firm), will not decrease welfare in most cases.

Vertical integration is irrelevant if the downstream market is perfectly competitive. With an oligopoly, the short- and long-run effects are somewhat different. In the short run consumers and the integrated firm always win, but competitors are hurt because they lose oligopolistic rents. Most of the time welfare increases unless output is redistributed away from efficient competitors toward a very inefficient vertically integrated firm. Finally, if there is free entry, competitors and consumers are indifferent in the long-run and vertical integration always increases welfare.

Keywords: access charge, essential input, free entry, network industries, oligopoly, stablity conditions

JEL Classification: L12, L22, L51

Suggested Citation

Galetovic, Alexander and Sanhueza P., Ricardo, Vertical Mergers and Competition with a Regulated Bottleneck Monopoly (March 2004). CEA Working Paper No. 181. Available at SSRN: https://ssrn.com/abstract=514382 or http://dx.doi.org/10.2139/ssrn.514382

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

Ricardo Sanhueza P.

Universidad de los Andes, Chile - School of Economics and Managerial Sciences ( email )

Chile

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