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A Bottleneck Input Supplier's Opportunity Cost of Competing Downstream

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  • Degraba, Patrick

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

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  • Degraba, Patrick, 2003. "A Bottleneck Input Supplier's Opportunity Cost of Competing Downstream," Journal of Regulatory Economics, Springer, vol. 23(3), pages 287-297, May.
    • Handle: RePEc:kap:regeco:v:23:y:2003:i:3:p:287-97
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    Cited by:

    1. Marc Bourreau & Romain Lestage, 2019. "Net neutrality and asymmetric platform competition," Journal of Regulatory Economics, Springer, vol. 55(2), pages 140-171, April.
    2. Neumann, Karl-Heinz & Vogelsang, Ingo, 2013. "How to price the unbundled local loop in the transition from copper to fiber access networks?," Telecommunications Policy, Elsevier, vol. 37(10), pages 893-909.
    3. Krämer Jan & Vogelsang Ingo, 2016. "Co-Investments and Tacit Collusion in Regulated Network Industries: Experimental Evidence," Review of Network Economics, De Gruyter, vol. 15(1), pages 35-61, March.
    4. Horstmann, Niklas & Krämer, Jan & Schnurr, Daniel, 2015. "Upstream Competition and Open Access Regimes: Experimental Evidence," 26th European Regional ITS Conference, Madrid 2015 127149, International Telecommunications Society (ITS).
    5. Hoernig, Steffen & Jay, Stephan & Neumann, Karl-Heinz & Peitz, Martin & Plückebaum, Thomas & Vogelsang, Ingo, 2012. "The impact of different fibre access network technologies on cost, competition and welfare," Telecommunications Policy, Elsevier, vol. 36(2), pages 96-112.
    6. Galetovic Alexander & Sanhueza Ricardo, 2009. "Vertical Mergers and Competition with a Regulated Bottleneck Monopoly," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-20, October.

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