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Killing the Goose That May Have Laid the Golden Egg?

Dieter Schmidtchen and Christoph Bier
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Dieter Schmidtchen: Universität des Saarlandes
Christoph Bier: Uni-Saarland - Center for the Study of Law and Economics

No 2005-1-1123, German Working Papers in Law and Economics from Berkeley Electronic Press

Abstract: The purpose of the paper is (1) to analyze the potential and the incentives for a vertically integrated input monopolist to engage in price-discrimination when there is downstream entry, and (2) to examine the question, whether a cost-based regulation of access charges for electricity grids enhances competition in the downstream-market. The paper shows that the incumbent will never block entry if the entrant is more efficient than the incumbent. The reason is that the input-monopolist can make more profit through input sales than it could generate by producing the downstream product itself. If the entrant does not have a cost advantage either the incumbent or the entrant gets a monopoly position. Providing for a level playing field by means of a cost-based regulation of access charges always creates competition in the downstream-market. The paper also derives the welfare effects of both the liberalization of the downstream-market and the cost-based regulation.

Keywords: discrimination; regulation; vertical integration; electricity; access charges; sabotage (search for similar items in EconPapers)
JEL-codes: L L L (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-ene, nep-mic and nep-reg
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