Regulation of a complementary imputed good in an competitive environment

This article investigates the problem of a regulated imputed good which is used in the production process of the final goods. The relationship between the firm producing the essential input factor and the regulating authority is described by a standard principal-agent setup. We show that ( by assuming a fixed functional relationship in the production process between the imputed good and the final market goods (there exists separation between regulation and competition on the final good market. Thus, the degree of competitiveness on the final good market has no effect on optimal contracts. Moreover, in our model vertical integration weakly dominates vertical disintegration in welfare for subadditive cost functions. (author's abstract)