Bottleneck co-ownership as a regulatory alternative

This paper proposes a regulatory mechanism for vertically related industries in which\nthe upstream �bottleneck� segment faces significant returns to scale while other (downstream)\nsegments may be more competitive. In the proposed mechanism, the ownership of the upstream firm\nis allocated to downstream firms in proportion to their shares of input purchases. This mechanism,\nwhile preserving downstream competition, partially internalizes the benefits of exploiting economies\nof scale resulting from an increase in downstream output. We show that this mechanism is more\nefficient than a disintegrated market structure in which the upstream natural monopoly bottleneck sets\na price equal to average cost.