Killing the Goose That May Have Laid the Golden Egg?

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German Working Papers in Law and Economics

AUTHOR:
Dieter Schmidtchen and Christoph Bier

TITLE:
Killing the Goose That May Have Laid the Golden Egg?

SUGGESTED CITATION:
Dieter Schmidtchen and Christoph Bier (2005) "Killing the Goose That May Have Laid the Golden Egg?", German Working Papers in Law and Economics: Vol. 2005: Article 9.
http://www.bepress.com/gwp/default/vol2005/iss1/art9

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ABSTRACT:
The purpose of the paper is (1) to analyze the potential and the incentives for a vertically integrated input monopolist to engage in price-discrimination when there is downstream entry, and (2) to examine the question, whether a cost-based regulation of access charges for electricity grids enhances competition in the downstream-market. The paper shows that the incumbent will never block entry if the entrant is more efficient than the incumbent. The reason is that the input-monopolist can make more profit through input sales than it could generate by producing the downstream product itself. If the entrant does not have a cost advantage either the incumbent or the entrant gets a monopoly position. Providing for a level playing field by means of a cost-based regulation of access charges always creates competition in the downstream-market. The paper also derives the welfare effects of both the liberalization of the downstream-market and the cost-based regulation.