VERTICAL INTEGRATION AND SHARED FACILITIES IN UNREGULATED INDUSTRIES

Felipe Balmaceda () and Eduardo Saavedra

Journal of Industrial Economics, 2007, vol. 55, issue 4, 771-772

Abstract: In this paper we analyze the equilibrium market structure, following liberalization, of an industry involving an essential facility. Two alternative modes of market entry are considered, in conjunction with vertical integration, namely: (i) full entry, which means building a new and more efficient facility at a positive fixed cost; and (ii) partial entry, which means purchasing existing capacity from the incumbent, at a fixed price per unit that is freely negotiated between the incumbent and the entrant. We show that vertical integration is a dominant strategy for each firm under either entry mode, and that upstream firms choose to share the incumbent's facility when the entrant's fixed cost exceeds a positive threshold. In addition, welfare analysis shows that in many situations the market can efficiently solve the trade‐off between fixed‐cost savings and softened downstream competition, thus providing a rationale for the liberalization of such industries. Several competition policy implications are discussed.

Date: 2007
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https://doi.org/10.1111/j.1467-6451.2007.00329_1.x

Related works:
Working Paper: Vertical Integration and Shared Facilities in Unregulated Industries (2004)
Working Paper: Vertical Integration and Shared Facilities in Unregulated Industries (2004)
Working Paper: Vertical Integration and Shared Facilities in Unregulated Industries (2004)
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