Monopolistic transportation and competitive production: The question of vertical integration in network industries (135)

Theme Track: Sectoral Changes and New Markets - Internet and IC Services

Author:
Ksoll, Markus

Suppose an industry which is characterized by two market stages, monopolistic transportation and competitive production. To sell their product at the locations of consumption each producing firm needs access to transportation capacity, which can thus be regarded as an essential input to the competitive stage. The past decade has seen the introduction of competition to a number of network industries now fitting this setting, such as electricity, gas and water utilities. Evolving from the traditional situation of vertically integrated monopolies, the common case is an incumbent firm owning the monopolistic network infrastructure, and providing it to its downstream subsidiary as well as to its competitors. Evidently, this raises concerns of market foreclosure, and vertical structure, i.e. integration versus separation, has become a key issue of deregulation. Combining spatial microeconomics and the theory of vertically related markets we create a model framework to address this question. Conventional wisdom from industrial economics predicts that in the absence of regulatory measures vertical integration yields better welfare results due to the partial avoidance of so-called double marginalization, whereas within the political debate vertical separation is often assumed to be superior. In our analysis, it turns out that the desirability of the structural arrangements hinges upon the employed pricing regime. For the presently common uniform pricing techniques, however, the theoretical findings from non-spatial industrial economics are shown to hold. keywords: network industries, vertical integration, spatial price theory.

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