Network Investment under Legal and Ownership Unbundling

We consider an industry where an upstream firm determines the size of a network used by two downstream firms. We contrast ownership unbundling and legal unbundling, where the upstream firm maximizes its total profit, including the profit of its downstream subsidiary(ies), but does not discriminate between them. Furthermore, each downstream subsidiary maximizes its own profit. We show that ownership separation is more detrimental to welfare than legal unbundling, whether the downstream market is perfectly competitive or not, and whether there are asymmetries in network needs across downstream firms, and downstream investments, or not.