Conglomerates and Regulation

Conglomerates operating integrated productions in different regulated and unregulated sectors may benefit of scope economies. However, the precise size of these synergies is often unknown to both rival firms and regulators. We show that the conglomerate's private information on scope economies may negatively affect both the regulated and the unregulated sectors depending on the precise nature of competition (strategic substitutes or complements). We also unveil a novel effect of regulation that involves an informational externality to the conglomerate's rivals. Notwithstanding these complications, and independently of the nature of competition, we show that in our model it is desirable, as for welfare, to let the firm run integrated productions, unless diseconomies of scope may realize.