A regulatory policy known as imputation has been recommended and applied in situations where a regulated firm with monopoly power over an essential input faces the threat of entry in one or more of its downstream markets. This policy generally imposes a price floor on the regulated firm's downstream output equal to the price it charges for the input plus the incremental cost of transforming a unit of that input into a unit of the final output. Such a floor is intended to prevent the regulated company from implementing predatory and/or preemptive pricing strategies against its downstream rivals. In this paper, the authors demonstrate the need for an imputation-type policy to safeguard downstream entrants from exclusionary pricing strategies by the vertically integrated incumbent. At the same time, however, the paper also illustrates several strategies available to the vertically integrated firm that can render imputation ineffective against such exclusionary conduct. It concludes, therefore, that imputation is unlikely to (effectively) protect new entrants that attempt to compete at the downstream stage.
