A Bottleneck Input Supplier's Opportunity Cost of Competing Downstream

Patrick Degraba

Journal of Regulatory Economics, 2003, vol. 23, issue 3, 287-97

Abstract: Should the supplier of a bottleneck input be prevented from vertically integrating downstream unless the (perhaps regulated) price of the input is set equal to costs? This issue has arisen with respect to the entry of incumbent local exchange carriers into the provision of long distance services. While competitors (and likely society) would prefer the bottleneck facility to be priced at marginal cost, this paper shows that entry by the bottleneck supplier when its price exceeds marginal cost will typically be welfare improving. The intuition is that the integrated firm behaves as if its marginal cost of the bottleneck input is lower than the price of the input, which results in lower prices, and increased welfare. This effect outweighs the potential distortions in the market caused by the artificial cost difference between the integrated firm and its competitors, and under plausible conditions can outweigh the effects of a competing firm exiting the market as a result of the integration. Copyright 2003 by Kluwer Academic Publishers

Date: 2003
References: Add references at CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://journals.kluweronline.com/issn/0922-680X/contents link to full text (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:regeco:v:23:y:2003:i:3:p:287-97

Ordering information: This journal article can be ordered from
http://www.springer. ... on/journal/11149/PS2

Access Statistics for this article

Journal of Regulatory Economics is currently edited by Menaham Spiegel

More articles in Journal of Regulatory Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().