Regulating Complementary Products: A Comparative Institutional Analysis

Optimal regulation, subject to informational constraints, is analyzed for industries for which production requires complementary inputs. An issue for regulatory policy is whether supply in these industries should be "bundled" or "unbundled." Bundled supply calls for regulation of an integrated industry. Unbundled supply has each component regulated separately. A main result is that unbundling introduces into regulation an additional component of information cost that is similar to "double marginalization" in the monopoly pricing of complementary products. Unbundling may be advantageous if it allows sufficient competition in nonmonopoly services, but the information cost can exceed the benefits of competition.