Vertical Integration, Regulation, & The Shifting Of Economic Profits

Abstract

A model which shows how a vertically integrated, multiproduct regulated monopolist can shift its monopoly profits to its upstream nonregulated affiliate is developed. The model is expanded to include a self-imposed constraint on the percentage mark-up of the transfer price which makes the regulatory constraint binding. The telecommunications industry is examined to determine what empirical evidence exists to support the shifting of profits’ hypothesis. Competitors are foreclosed from the market based on the desire to shift profits not on an economic efficiency criterion. How a multiproduct regulated monopolist reacts to competition in one of its product lines is analyzed.