Opportunism in the presence of an essential facility

Economics

Regulation Initiative Working Paper Series

1996

In this paper the problem of opportunism in the presence of an essential facility is examined. Two firms A and B can produce the same good. Firm A owns an essential facility and firm B can only gain access to consumers via this facility. A three stage game is used to characterise the existence of a perfect equilibrium. It is shown that each firm acts opportunistically and that, depending on absolute & relative costs, an equilibium will fall into one of three categories: (i) only firm A invests (ii) both firms invest or (iii) only firm B invests. A linear example is explained in detail and used to illustrate the findings. Various extensions are undertaken, including a comparison with an equivalent static Spengler (1950) model. Comments on welfare and some brief policy disscussion accompany the analysis.

Regulation Initiative (closed)

3

Regulation Initiative Working Paper Series

No