Galetovic A., Bustos A., (2009), Vertical Integration and Sabotage with a Regulated Bottleneck Monopoly, The B.E. Journal of Economic Analysis & Policy, vol. 9, (Topics), article 5

Abstract

Consider a bottleneck monopoly that sells ìaccessî at a regulated price and may compete
with independent downstream firms through a subsidiary. We systematically study the vertical integration decision and the optimal intensity of sabotage. The main results are as follows. First, unless the subsidiary is implausibly more e¢ cient than independent Örms, vertical integration never beneÖts consumers. Moreover, sabotage may prompt ine¢ cient vertical integration, in which case case welfare unambiguously falls. Second, if the subsidiary and independent firms coexist in equilibrium, the intensity of sabotage increases with the subsidiaryís market share and falls with the elasticity of the derived
demand for access; only small subsidiaries do not sabotage. And the intensity of sabotage
increases with the subsidiaryís size and the intensity of economies of scope. Third, when the bottleneck monopoly optimally excludes rivals, optimal sabotage is determined by a standard Lerner condition augmented to incorporate the direct cost of sabotage.
Also, the intensity of sabotage falls with economies of scope and the subsidiaryís size.

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