Imperfect legal unbundling of monopolistic bottlenecks
We study an industry with a monopolistic bottleneck supplying an essential input to several downstream firms. Under legal
unbundling the bottleneck must be operated by a legally independent upstream firm, which may be partly or fully owned by an
incumbent active in downstream markets. Access prices are regulated but the upstream firm can perform non-tariff discrimination.
Under perfect legal unbundling the upstream firm maximizes only own profits; with imperfections it is biased and to some extent
accounts also for the incumbent’s downstream profits. We show that increasing the incumbent’s ownership share increases total
output if the upstream firm’s bias is sufficiently small, while otherwise effects are ambiguous. Stronger regulation that
reduces the bias without changing ownership shares generally increases total output. We also endogenize the bias and show
that it can depend non-monotonically on the ownership share.