Legal Unbundling can be a Golden Mean between Vertical Integration and Separation

Felix Höffler and Sebastian Kranz

No 15/2007, Bonn Econ Discussion Papers from University of Bonn, Bonn Graduate School of Economics (BGSE)

Abstract: We study an industry in which an upstream monopolist supplies an essential input at a regulated price to several downstream firms. Legal unbundling means that a downstream firm owns the upstream firm but this upstream firm is legally independent and maximizes its own upstream profits. We allow for non-tariff discrimination by the upstream firm and show that under quite general conditions legal unbundling yields (weakly) higher quantities in the downstream market than vertical separation and integration. Therefore, typically consumer surplus will be largest under legal unbundling. Outcomes under legal unbundling are still advantageous when we allow for discriminatory capacity investments, investments into marginal cost reduction and investments into network reliability. If access prices are unregulated, however, legal unbundling may be quite undesirable.

Keywords: Network industries; regulation; vertical relations; investments; ownership; sabotage (search for similar items in EconPapers)
JEL-codes: D2 D4 L1 L42 L43 L51 (search for similar items in EconPapers)
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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