Incentives for non-price discrimination

A regulated upstream monopolist supplies an essential input to firms in a downstream market. Non-price discrimination or sabotage becomes a concern when the upstream monopolist vertically integrates downstream. This article develops a simulation algorithm to determine the likelihood that discrimination will arise in equilibrium using data from the US long-distance market. Based on 1000 random draws of own and cross-price elasticities, the simulations reveal that discrimination arises in 934 cases at current access charges. This analysis has implications for regulatory policy, including access charge reform and entry by the Regional Bell Operating Companies into the interLATA long distance market. (C) 2002 Elsevier Science B.V. All rights reserved.