Bottleneck co-ownership as a regulatory alternative |
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Authors: | Federico Boffa John Panzar |
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Institution: | (1) Economic Science Institute, Chapman University, One University Drive, CA 92866 Orange, USA;(2) Departamento de Econom?a, Universidad Carlos III de Madrid, Calle Madrid 126, 28903 Getafe, Spain |
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Abstract: | This paper proposes a regulatory mechanism for vertically related industries in which the upstream “bottleneck” segment faces
significant returns to scale while other (downstream) segments may be more competitive. In the proposed mechanism, the ownership
of the upstream firm is allocated to downstream firms in proportion to their shares of input purchases. This mechanism, while
preserving downstream competition, partially internalizes the benefits of exploiting economies of scale resulting from an
increase in downstream output. We show that this mechanism is more efficient than a disintegrated market structure in which
the upstream natural monopoly bottleneck sets a price equal to average cost. |
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Keywords: | |
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