TO REGULATE OR TO DEREGULATE? THE ROLE OF DOWNSTREAM COMPETITION IN UPSTREAM MONOPOLY VERTICALLY LINKED MARKETS

Michael Polemis () and Konstantinos Eleftheriou

Bulletin of Economic Research, 2018, vol. 70, issue 1, 51-63

Abstract: This paper attempts to cast light to the effect of monopoly regulation in Cournot markets compared to its effect in Bertrand markets. To this purpose, we use a simple model of a vertically linked market, where an upstream regulated natural monopoly is trading via two†part tariff contracts with a downstream duopoly. Combining our results to those of the existing literature on deregulated markets, we argue that when the downstream competition is in prices, efficiency dictates regulating the monopoly with a marginal cost based pricing scheme. However, this type of regulation leads to significant welfare loss, when the downstream market is characterized by Cournot competition.

Date: 2018
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https://doi.org/10.1111/boer.12116

Related works:
Working Paper: To Regulate or to Deregulate? The Role of Downstream Competition in Upstream Monopoly Vertically Linked Markets (2015)
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