DP6238 Regulating a Multi-Utility Firm

Author(s): Giacomo Calzolari, Carlo Scarpa
Publication Date: May 2007
Keyword(s): asymmetric information, competition, informational externality, multi-utility firms, regulation, scope economies
JEL(s): L43, L51, L52
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6238

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.