Vertical Integration and Costly Demand Information in Regulated Network Industries |
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| Authors: | Elisabetta Iossa Francesca Stroffolini |
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| Institution: | 1. SEFEMEQ, Faculty of Economics, University of Rome Tor Vergata, CMPO and EIEF, Via Columbia 2, 00133, Rome, Italy
2. Department of Economics, Faculty of Economics, University of Naples Federico II and CSEF, Montesantangelo, via Cinthia, 80126, Naples, Italy
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| Abstract: | We study how vertical integration affects the acquisition and transmission of demand information in regulated network industries. Demand information helps to set the access price, incentivize infrastructure investment, and foster competition in the unregulated downstream market. We show that when demand information is costly and private, the optimal access prices are independent of demand levels. Vertical integration then secures greater welfare in new markets where little demand information is available or where infrastructure cost is low, or when investing is highly risky. In the remaining cases, vertical separation is preferable. |
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