CICERO - Center for International Climate Research

Access pricing with regulated downstream competition and upstream externalities

Kristin Linnerud, Steinar Vagstad

We examine the optimal funding of farmers who have organised their activity in a cooperative that controls the supply of an input factor and meets competition in the market for its processed product. Since the rival's cost is private information, it may earn a rent. We show that the optimal price on the input factor – the access price – discriminates against the rival because rent is more valuable in the cooperative, and the regulator, therefore, sacrifices some cost efficiency in order to shift rents. The result is derived in a simplified context, but applies to contexts with more participants and products.

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