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Access pricing with regulated downstream competition and upstream externalities

Kristin Linnerud, Steinar Vagstad

We examine the optimal funding of farmers who have organised their activity in a cooperative that controls the supply of an input factor and meets competition in the market for its processed product. Since the rival's cost is private information, it may earn a rent. We show that the optimal price on the input factor – the access price – discriminates against the rival because rent is more valuable in the cooperative, and the regulator, therefore, sacrifices some cost efficiency in order to shift rents. The result is derived in a simplified context, but applies to contexts with more participants and products.

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