Working Paper: CEPR ID: DP6238
Authors: Giacomo Calzolari; Carlo Scarpa
Abstract: We study the regulation of a utility firm which is active in a competitive unregulated sector as well. If the firm jointly operates its activities in the two markets, it enjoys economies of scope, whose size is the firm?s private information and is unknown to the regulator and the rival firms. We jointly characterize the unregulated market outcome (with price and quantity competition) and also optimal regulation. Accounting for the several effects of regulation on the unregulated market, we show the existence of an informational externality, in that regulation provides useful information to the rival firms. Although joint operation of multi-utility?s activities generates scope economies, it also brings about private information to the multi-utility, so that regulation is less efficient and also the unregulated market may be negatively affected. Nevertheless, we show that letting the multi-utility integrate productions is (socially) desirable, unless joint production is instead characterized by dis-economies of scope.
Keywords: Asymmetric Information; Competition; Informational Externality; Multiutility Firms; Regulation; Scope Economies
JEL Codes: L43; L51; L52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| regulation (L51) | social welfare (I38) |
| multiutility operations (L97) | social welfare (I38) |
| integration of multiutility activities (L99) | informational externalities (D62) |
| informational externalities (D62) | competition in unregulated market (L13) |
| regulatory policies (not accounting for private information) (G38) | inefficiencies in regulated markets (D61) |
| regulatory policies (not accounting for private information) (G38) | inefficiencies in unregulated markets (D61) |
| type of competition (L13) | regulatory process (L51) |
| type of competition (L13) | market dynamics (D49) |