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Upstream Competition between Vertically Integrated Firms

Authors


  • Intellectual and financial support by France Télécom, the Chair for Business Economics at Ecole Polytechnique and CEPREMAP is gratefully acknowledged. This paper has previously been circulated under the title ‘Wholesale Markets in Telecommunications.’ We wish to thank Eric Avenel, Bernard Caillaud, Philippe Février, Steffen Hoernig, Marc Ivaldi, Bruno Jullien, Tilman Klumpp, Laurent Lamy, Marc Lebourges, Laurent Linnemer, Patrick Rey, Michael Riordan, Katharine Rockett, Bernard Salanié, Jean Tirole, Thomas Trégouët, Timothy Van Zandt and various conference and seminar participants. We also thank the Editor and two anonymous referees for their helpful and stimulating suggestions. We are solely responsible for the analysis and conclusions.

Abstract

We propose a model of two-tier competition between vertically integrated firms and unintegrated downstream firms. We show that, even when integrated firms compete in prices to offer a homogeneous input, the Bertrand logic may collapse, and the input may be priced above marginal cost in equilibrium. These partial foreclosure equilibria are more likely to exist when downstream competition is fierce or when unintegrated downstream competitors are relatively inefficient. We discuss the impact of several regulatory tools on the competitiveness of the wholesale market.

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