Legal vs. Ownership Unbundling in Network Industries

Competition Policy and Antitrust and Networks, the Internet, and Cloud Computing

Article Snapshot

Author(s)

Helmuth Cremer, Jacques Crémer and Philippe De Donder

Source

IDEI Working Paper, No. 405, July 2006

Summary

This paper asks if we benefit when networks own firms that use the networks.

Policy Relevance

If regulators block networks from sharing in the profits from other network services, network operators tend to build out their networks less.

Main Points

  • Network businesses such as telephone service, railways, electricity, and natural gas, involve an “upstream” firm that invests in a network (e.g. a pipeline), and competing “downstream” firms that use the network (e.g. to sell gas to households and industry).

  • Regulators can control deals between upstream and downstream firms by restricting mergers, or by disallowing ownership of downstream firms by upstream firms (“ownership unbundling”). But people might benefit when upstream and downstream firms are joined together and run as a single business.

  • Most regulation uses “legal unbundling.” The upstream firm can affiliate with the downstream firm, but relations between the two such as prices are regulated. The upstream firm must charge its affiliated downstream firm the same “access charges” to use the network as other downstream competitors.

  • With legal unbundling, network firms will tend to build out network less; its profits from the downstream firm are limited.

  • With both legal and ownership unbundling, regulators do not control how much the upstream firm invests in growing its network. With ownership unbundling, network firms will tend to build networks with even less capacity, because profits come only from access charges and access prices on a more crowded network are higher.

  • Investment by downstream firms might not be enough to counteract the effects of less investment by upstream firms.

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