Abstract
Integrated firms operating in one regulated and one unregulated market may have incentives to use cross-subsidization tactics in order to raise the regulated price. Cross-subsidization generally implies increased production in the unregulated market, which with imperfect competition results in a lower price in the unregulated market and a higher price in the regulated market. This follows quite directly from almost any model of cross-subsidization if one adds the assumption of imperfect competition, but has not been suggested in the literature previously. Based on this patterns of cross-subsidization within an industry can be detected. The incentives for cross-subsidization will be stronger during periods with costbased regulation, compared with price-based regulation. More closely integrated firms will have better possibilities to engage in successful cross-subsidization. This is tested using a panel data set the from the Norwegian electricity retail industry that covers periods with different regulatory regimes and firms with different organizational structure. Our main finding is that data support our hypothesis. The regulated price is higher in periods with cost-based regulation and there is also some evidence that more closely integrated firms charge a higher price for the regulated service. Furthermore, there exists a negative relationship between the regulated and unregulated prices in this industry, which we expect to find if some firms are crosssubsidizing while others are not. This effect is reduced when cost-based regulation is replaced with price-based regulation and it is also smaller for less integrated firms.