Regulating a multi-utility firm

We study the regulation of a multi-utility, i.e. a utility firm that is also active in a competitive, unregulated sector. If the firm conducts its activities in the two markets jointly, it enjoys economies of scope whose magnitude is the firm’s private information, unknown either to the regulator or to the rival firms. We jointly characterize the unregulated market outcome (with price and quantity competition) and optimal regulation. Accounting for the several effects of regulation on the unregulated market, we show the existence of an informational externality, in that regulation provides useful information to the rival firms. Although joint conduct of multi-utility’s activities generates scope economies, it also brings private information to the multi-utility, so that regulation is less efficient and the unregulated market too may be adversely affected. Nevertheless, we show that allowing the multi-utility to integrate productions is (socially) desirable, unless joint production is characterized by diseconomies of scope.