Welfare effects of one-sided regulation when internationally traded complements are unregulated

We consider the effects of a one-sided price regulation of one of two complementary inputs. The provider of the regulated component is a domestic firm, while the provider of the other component is a foreign firm. This describes the market structure for several digital information and communication services. We show that one-sided regulation may have negative welfare effects compared to a free market economy unless the regulator has a first-mover advantage. In the latter case, regulation is welfare enhancing regardless of whether the foreign input provider uses
linear or non-linear wholesale prices.