How to Regulate Vertical Market Structure in Network Industries

This paper analyzes the equilibrium outcomes in a network industry under different vertical market structures. In this industry, an upstream monopolist operates a network used as an input to produce horizontally differentiated final products that are imperfect substitutes. Three potential drawbacks of market structure regulation are analyzed: (i) double marginalization, (ii) underinvestment, and (iii) vertical foreclosure. We explore the conditions under which these effects emerge and discuss when the breakup of an integrated network monopolist is adequate.