Access Price Cap Mechanisms and Industry Structure with Information Acquisition

Francesca Stroffolini ()
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Francesca Stroffolini: University of Napoli “Federico II” and CSEF

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: This paper considers a network industry characterized by an upstream natural monopoly with cost uncertainty, regulated through an access price mechanism, and an unregulated downstream market with Cournot competition. The upstream monopolist can acquire information on the upstream cost while the information acquisition is prohibitively costly for the regulator and downstream firms. The information acquisition is also unobservable. I investigate how the presence of costly and socially valuable information on the upstream cost affects the desirability of allowing the upstream monopolist to produce in the downstream market (integration) rather than excluding it (separation). I show that when the upstream monopolist is regulated only through an access price cap, the information acquisition problem provides an argument in favour of vertical integration. However, when the regulator also obliges the upstream monopolist to share her access profits with consumers, a bias emerges in favour of separation via the impact of the access-profit sharing plan on the upstream monopolist's incentives to transmit information to her rival in the downstream market.

Keywords: access price cap mechanisms; integration; separation; information acquisition. (search for similar items in EconPapers)
JEL-codes: D82 D83 L5 (search for similar items in EconPapers)
Date: 2008-01-01
New Economics Papers: this item is included in nep-com, nep-cta and nep-mic
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Published in Rivista di Politica Economica, 2009, issue 1, pp. 209-247

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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:193

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