Can Separation reduce Non-Price Discrimination and increase - PowerPoint PPT Presentation

Can Separation reduce Non-Price Discrimination and increase Welfare? Duarte Brito Pedro Pereira João Vareda

Background 2 vertically integrated firm wholesale monopolist incentives discriminate retail rivals

Background 3 non-price discrimination harder to detect/prosecute than price discrimination

Background 4 various types of vertical separation proposed in different contexts e.g., Regulation of NGN

Background 5 Reasoning : 1) vertically integrated firm discriminates 2) separation eliminates discrimination 3) no-discrimination increases welfare

Plan 6 (1) Model (2) Discrimination (3) Separation (4) Conclusion

Part 1 of 4 7 Model

Industry 8 Two Overlapping Markets wholesale market retail market

Wholesale Market 9 wholesale market produces input indispensable for retail market a – access price regulated monopolist wholesaler

Retail Market 10 incumbent’s retailer entrant D – relative quality horizontal and vertical differentiated

Vertical Integration and Separation 11 incumbent = wholesaler + incumbent’s retailer incumbent may be separated

Quality Degradation 12 wholesaler can degrade quality of input demand-reducing/cost-increasing

Pricing 13 retail: two-part tariffs wholesale: linear tariff, a only wholesale regulated

Timing 14 (1) regulator decides separation (2) wholesaler decides degradation (3) retail competition

Comments 15 no vertical-integration economies same access price

16 Part 2 of 4 Discrimination

Discrimination: Vertical Integration 17 against entrant a low & D low no discrimination a high D high

Discrimination: Vertical Separation 18 against entrant a low & D low against incumbent’s retailer a low & D high no discrimination a high & D intermediate

Comparison 19 set of parameter values for which there is degradation against entrant is smaller under separation discrimination against entrant may increase with separation incumbent’s retailer may be discriminated against no discrimination under integration and separation, if a high entrant always discriminated if ( a , D ) low

Comparison 20

Comparison 21

Comparison 22 almost anything goes!

Welfare 23 discrimination can  welfare if D low: entrant if D high: incumbent’s retailer discriminate low quality

24 Part 3 of 4 Separation

Welfare 25 Effects : (1) double-marginalization: - (2) discrimination: + / -

Integration Socially Optimal 26 Integration Separation no discrimination  no discrimination no discrimination  discriminate inc. discriminate ent.  no discrimination discriminate ent.  discriminate ent. D low

Vertical Structure 27 otherwise socially optimal decision potentially ambiguous

Part 4 of 4 28 Conclusion

Conclusions 29 (1) separation can, but need not eliminate discrimination (2) sometimes discrimination is good (3) use vertical separation with care!

30 thank you pedro.br.pereira@gmail.com