STRUCTURE REGULATION, PRICE STRUCTURE, CROSS‐SUBSIDIZATION AND MARGINAL COST OF PUBLIC FUNDS*

Ming Chung Chang and Hsiao‐ping Peng

Manchester School, 2009, vol. 77, issue 6, 675-698

Abstract: In this paper we study the social desirability of the structure regulation which transforms a single multi‐product monopoly into an oligopoly where the industry produces differentiated complementary goods. In particular, we pay special attention to the cross‐subsidization which will be eliminated by the structure regulation. It is established that if horizontal externalities between the goods are not too strong, then the monopoly has a socially optimal price structure. In contrast, the oligopoly always distorts the price structure. We also demonstrate that the monopoly will cross‐subsidize a product if and only if this product has a relatively low absolute advantage.

Date: 2009
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