REGULATING COMPLEMENTARY PRODUCTS - A COMPARATIVE INSTITUTIONAL ANALYSIS

Optimal regulation, subject to informational constraints, is analyzed for industries for which production requires complementary inputs. An issue for regulatory policy is whether supply in these industries shou ld be ''bundled'' or ''unbundled.'' Bundled supply calls for regulatio n of an integrated industry. Unbundled supply has each component regul ated separately. A main result is that unbundling introduces into regu lation an additional component of information cost that is similar to ''double marginalization'' in the monopoly pricing of complementary pr oducts. Unbundling may be advantageous if it allows sufficient competi tion in nonmonopoly services, but the information cost can exceed the benefits of competition.