Consider a bottleneck monopoly whose access charge is regulated above marginal cost and produces an essential input used by an oligopoly of downstream firms. Should the monopolist be allowed to vertically integrate into the downstream market? Policy makers often argue that the vertically integrated subsidiary enjoys an undue advantage, because it receives access at marginal cost. We show that there is no undue advantage.With perfect competition downstream vertical integration is irrelevant because the subsidiary substitutes downstream output one-to-one and faces a per-unit opportunity cost equal to the access charge.With an oligopoly consumers and the bottleneck monopoly gain with vertical integration. By contrast, competitors lose oligopolistic rents. Social welfare increases, unless output is redistributed towards a very inefficient vertically integrated firm.
The B.E. Journal of Economic Analysis & Policy (BEJEAP) is an international forum for scholarship that employs microeconomics to analyze issues in business, consumer behavior and public policy. Topics include the interaction of firms, the functioning of markets, the effects of domestic and international policy and the design of organizations and institutions.