STRUCTURE REGULATION, PRICE STRUCTURE, CROSS-SUBSIDIZATION AND MARGINAL COST OF PUBLIC FUNDS

In this paper we study the social desirability of the structure regulation which transforms a single multi-product monopoly into an oligopoly where the industry produces differentiated complementary goods. In particular, we pay special attention to the cross-subsidization which will be eliminated by the structure regulation. It is established that if horizontal externalities between the goods are not too strong, then the monopoly has a socially optimal price structure. In contrast, the oligopoly always distorts the price structure. We also demonstrate that the monopoly will cross-subsidize a product if and only if this product has a relatively low absolute advantage. Copyright © 2009 The Authors. Journal compilation © 2009 Blackwell Publishing Ltd and The University of Manchester.