Partial Regulation in Vertically Differentiated Industries

Authors


  • Angela S. Bergantino, University of Bari, DSEMM, Italy. Etienne Billette de Villemeur, Toulouse School of Economics, IDEI and GREMAQ, France (Etienne.deVillemeur@TSE-fr.eu). Annalisa Vinella, University of Bari, DSEMM, Italy.

  • The paper was completed while the second author was visiting the University of Montréal, whose hospitality is gratefully acknowledged. We are indebted to Carlo Fiorio, David Martimort, Jérôme Pouyet, Bertrand Villeneuve, Ingo Vogelsang, an Associate Editor and two anonymous referees for helpful suggestions. We further acknowledge useful comments from participants at the XVIII SIEP Meeting (Pavia), the 5th Infraday (Berlin), the 4th Conference on Railroad Industry Structure, Competition and Investment (Madrid), the 47th SIE Meeting (Verona) and the 22nd EEA Meeting (Budapest), as well as from seminar participants at the University of Florence. All remaining errors are our own.

Abstract

We provide theoretical foundations for quality-adjusted price-cap regulation in industries where a regulated incumbent and an unregulated entrant offer vertically differentiated products competing in price and quality. We show that, whether or not the incumbent anticipates the reaction of the entrant, the optimal weights in the cap depend upon the market served by the entrant, despite the latter not being directly concerned by regulation. We further show that the cap is robust to small errors in the weights. Our findings point to the conclusion that, in partially regulated industries, regulators should use information about the whole sectors rather than on the sole regulated incumbents.

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