The design of industry structure in a vertically related market

by Raffaele Fiocco

We consider a vertically related market characterized by downstream imperfect competition and by the monopolistic provision of an essential facility-based input, whose price is set by a regulatory agency. Two possible industry patterns are examined: the regime of ownership separation, which prevents a single company from having the control of both upstream and downstream operations, and that of legal separation, under which these activities are legally unbundled but common ownership is allowed. We find that with regulatory limited knowledge about the input costs legal separation creates countervailing incentives within the vertical group to use strategically its private information, which the regulator can exploit to improve social welfare.