The Effect Of Vertical Separation Of Incumbent Firms

In order to answer the above question, we mist first outline what exactly is meant by ‘vertical separation.’ This is when a two stages of one operation in a market becomes housed by two firms, however where one company is the monopoly provider, the parent owner is also the provider of the complimentary good, the owner being the ‘infrastructure manager’. The incentive is to instil competition in the market. Alternatively, when a large company distributes various tasks or a component of a goods production process into sections, either division or geographical, this is also known as vertical separation. The basic problem with this method is, being a natural monopoly allows the owner to prevent or restrict competition due to the scale of market power dominance, as well as alter price, product quality, quantity and so on. Structurally speaking, there are various management options open to the monopoly owner on how to designate the segmented firms, such as vertical ownership, joint ownership etc. To begin analysing the effect of vertical separation of incumbent firms and how well it stimulates competition within that economy, we must firstly keep one idea in mind, and that is what effect would result from the industry or company being managed as a single firm or being segmented into smaller, more focussed firms ie, separated. Economic analyses of vertical separation of firms has lead to two main points regarding the outcome of such a method. 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