Access to Bottleneck Inputs under Oligopoly: a Prisoners Dilemma?

In this article, we analyze the incentives of vertically integrated oligopolists to concede access to their bottleneck inputs to an entrant in the downstream retail market. We develop a two-stage model, where in the first stage a downstream entrant negotiates an access price with three vertically integrated incumbents, and in stage 2 firms compete on Salop's circle. The incumbents may be asymmetrically located on the circle, to reflect differences in consumer shares. For some levels of asymmetry, the incumbents face a prisoners dilemma with respect to conceding access to their bottleneck inputs. Entry by a downstream firm may lead to lower retail prices. However, entry may also lead to higher retail prices for the access provider and for the entrant.