Downstream integration by a bottleneck input supplier whose regulated wholesale prices are above costs

We examine the consequences of allowing a bottleneck input supplier to vertically integrate downstream and compete with users of the input when the input has a regulated price above cost. If the supplier maximizes the sum of short-run profits from the downstream market and input market, then allowing the vertical integration will increase social surplus, even if it causes sellers of competing differentiated products to exit the market. If the bottleneck supplier wishes to engage in predatory pricing, increasing the regulated price of the input above cost reduces the incentive to engage in predation. These questions are motivated primarily by assertions made in the public record that allowing Bell Operating Companies into long distance can be harmful if access rates are above cost.