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VERTICAL INTEGRATION AND SHARED FACILITIES IN UNREGULATED INDUSTRIES
Author(s) -
BALMACEDA FELIPE,
SAAVEDRA EDUARDO
Publication year - 2007
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/j.1467-6451.2007.00329_1.x
Subject(s) - upstream (networking) , vertical integration , fixed cost , purchasing , industrial organization , downstream (manufacturing) , competition (biology) , liberalization , market structure , business , free entry , unit (ring theory) , barriers to entry , market share , welfare , economics , microeconomics , market economy , marketing , computer science , telecommunications , ecology , mathematics education , mathematics , biology
In this paper we analyze the equilibrium market structure, following liberalization, of an industry involving an essential facility. Two alternative modes of market entry are considered, in conjunction with vertical integration, namely: (i) full entry, which means building a new and more efficient facility at a positive fixed cost; and (ii) partial entry, which means purchasing existing capacity from the incumbent, at a fixed price per unit that is freely negotiated between the incumbent and the entrant. We show that vertical integration is a dominant strategy for each firm under either entry mode, and that upstream firms choose to share the incumbent's facility when the entrant's fixed cost exceeds a positive threshold. In addition, welfare analysis shows that in many situations the market can efficiently solve the trade‐off between fixed‐cost savings and softened downstream competition, thus providing a rationale for the liberalization of such industries. Several competition policy implications are discussed.