Sogang University

Application of Shapley Value on Network Industries with Essential Facilities

Email address: jeonsh@ccs.sogang.ac.kr

Keywords: Shapley value, Network Industry, Essential Facilities, Vertical and Horizontal Merger

JEL Classifications: C71, L22, L90

Abstract:
In the paper we consider a network industry in which an upstream operator provides the essential facility or input for K downstream operators which with access to the essential factor, supply final services for end-users. We adopt the Shapley-value approach to determine the incentives of vertical and horizontal mergers. The main findings are as follows. When K = 2 and 3, the necessary and sufficient condition for the benefits of a merger, either vertical or horizontal, is that the characteristic value function is concave in the network size of coalition. With general K > 3, we show the same result holds true for vertical integration by assuming that there do not exist dominant downstream operators. On the other hand, we show that it is impossible to establish the same result for horizontal integration when K > 3, by constructing a counterexample. We explain the results in terms of fair-share consideration and bargaining-power consideration incorporated in the Shapley values. Finally, we discuss the relevance of the model to the deregulated local-monopoly industries such as cable television and gas industries.

PDF file of paper: jeon.pdf

Session: Network Economics

Time: Sunday, 8 July, 8am - 9:30am

Room: A