CAN TOTAL DEREGULATION BE A BETTER OPTION THAN PARTIAL DEREGULATION?

Abstract

This paper examines entry deregulation in an industry where natural monopoly and potential competition are vertically related. We find that the upstream fixed cost plays an important role to affect the overall welfare comparison between total and partial deregulation. When the upstream fixed cost is sufficiently large, the number of downstream firms is limited in both situations; in other words, the duplication of downstream fixed costs is relatively irrelevant so that the double markup effect dominates. Consequently, the regulator can only replicate total deregulation to maximize social welfare in the event of partial deregulation. If it is the case, we suggest that total deregulation is superior to partial deregulation since the latter suffers more regulatory cost than that of the former.