Legal unbundling and auctions in vertically integrated (utilities) markets

Silvester Van Koten

European Journal of Law and Economics, 2013, vol. 36, issue 3, 543-573

Abstract: This paper addresses the effectiveness of auctions and legal unbundling as regulatory measures to tender a vertically integrated industry more competitive. Specifically, I analyze if implementing auctions and legal unbundling can counter market power in an industry where a Vertically Integrated Corporation (VIC) has a monopoly position in an essential, scarce upstream activity and also owns one of the firms active in the competitive downstream activity. In an earlier paper, Van Koten ( 2011 ), I showed that in this configuration the VIC, by having its downstream firm bid more aggressively, can—through increased auction revenue—increase its profit, while disadvantaging downstream competitors and lowering efficiency. Here I analyze the regulatory measure of also legally separating the downstream firm from the VIC. I show that such a measure may only be partially effective; the VIC can formulate a simple compensation scheme that does not violate restrictions typically imposed by legal separation but induces the manager of the VIC-owned downstream firm to bid more aggressively. This increases the profits of the VIC, decreases efficiency, and disadvantages downstream competitors. Copyright Springer Science+Business Media, LLC 2013

Keywords: Regulation; Vertical integration; Competition; Electricity markets; Strategic delegation; L22; L43; L51; L94; L98 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s10657-011-9269-0

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