Essays on optimal capacity and optimal regulation of interconnection infrastructures

The integration between geographically differentiated markets or between vertically related industries generate effects on welfare that depend on the structure of the underlying markets. My thesis investigates the impact of geographical interconnection on welfare, and illustrates welfare-enhancing modes of regulation of vertically integrated industries and of geographically integrated markets.; The first chapter analyzes the effects of interconnection between two formerly fully-separated markets under the assumptions that producers in the two markets are capacity-constrained, and tacitly collude whenever it is rational for them to do so. I find that there exists a set of assumptions under which interconnection brings about greater collusion, hence it reduces overall welfare.; The second chapter analyzes the optimal interconnection capacity allocation mechanism for a benevolent electricity regulator when generation is not competitive. The regulator's intervention should not only ensure that interconnection capacity is efficiently allocated to the most efficient firms, but it should also induce a higher welfare in the upstream generation market. In a two-node setting, with one firm per node, I show that the regulatory intervention becomes more effective as the cost asymmetries between the two firms become more pronounced.; The third chapter illustrates a regulation mechanism for vertically related industries. Ownership shares of the upstream industry (that displays economies of scale) are allocated to the downstream (competitive) firms in proportion to their shares in the final goods market. I show that the mechanism combines the benefits of vertical integration with those of vertical separation. The advantages of vertical integration consist in avoiding double marginalization, and in internalizing the reduction in average cost resulting from the upstream increase in output; on the other hand, vertical separation allows to preserve the competitiveness of the downstream sector. I also show that this mechanism improves in efficiency with respect to the Demsetz auction, and, finally, that it displays desirable properties as far as collusion and quality levels are concerned.; The fourth chapter empirically estimates the benefit of removing the most crucial transmission bottleneck in the Italian electricity market, by building additional transmission capacity. Benefits are found to be relevant.