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A Test for Natural Monopoly with Application to Norwegian Electricity Distribution

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Author Info

  • Kjell G. Salvanes
  • Sigve Tjøtta

Abstract

Reorganization of public utilities is on the current political agenda in many European countries. However, in many cases the most fundamental question in terms of public policy towards these industries is not tested; does the underlying cost structure indicate a natural monopoly or not? Evans and Heckman's analysis of the US Bell System is one of the few exceptions, but their method has a serious problem as their estimated cost function is not well behaved (negative marginal costs). To solve this problem we propose to use the consistency region (i.e., the region where the estimated cost function is well behaved) as the test region. We apply our testing procedure to Norwegian electricity distribution and find that local electricity distribution is characterised as a natural monopoly. Policy implications of the result is also discussed.

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Bibliographic Info

Article provided by Springer in its journal Review of Industrial Organization.

Volume (Year): 13 (1998)
Issue (Month): 6 (December)
Pages: 669-685

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Handle: RePEc:kap:revind:v:13:y:1998:i:6:p:669-685

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Web page: http://www.springerlink.com/link.asp?id=100336

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Cited by:
  1. Jamasb, T. & Nillesen, P. & Pollitt, M., 2003. "Strategic Behaviour under Regulation Benchmarking," Cambridge Working Papers in Economics 0312, Faculty of Economics, University of Cambridge.
  2. Orea, Luis & Growitsch, Christian & Jamasb, Tooraj, 2012. "Using Supervised Environmental Composites in Production and Efficiency Analyses: An Application to Norwegian Electricity Networks," EWI Working Papers 2012-18, Energiewirtschaftliches Institut an der Universitaet zu Koeln.
  3. John Kwoka, 2005. "Electric power distribution: economies of scale, mergers, and restructuring," Applied Economics, Taylor & Francis Journals, vol. 37(20), pages 2373-2386.
  4. Bloch, Harry, et al, 2001. "The Cost Structure of Australian Telecommunications," The Economic Record, The Economic Society of Australia, vol. 77(239), pages 338-50, December.
  5. Mancuso, Paolo, 2012. "Regulation and efficiency in transition: The case of telecommunications in Italy," International Journal of Production Economics, Elsevier, vol. 135(2), pages 762-770.
  6. Giovanni Fraquelli & Massimiliano Piacenza & Davide Vannoni, 2004. "Scope and scale economies in multi-utilities: evidence from gas, water and electricity combinations," Applied Economics, Taylor & Francis Journals, vol. 36(18), pages 2045-2057.
  7. Nillesen, P. & Pollitt, M.G., 2008. "Ownership unbundling in electricity distribution: empircal evidence from New Zealand," Cambridge Working Papers in Economics 0836, Faculty of Economics, University of Cambridge.
  8. A. Yatchew, 2000. "Scale economies in electricity distribution: a semiparametric analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(2), pages 187-210.
  9. Saplacan, Roxana, 2008. "Competition in electricity distribution," Utilities Policy, Elsevier, vol. 16(4), pages 231-237, December.
  10. Jamasb, Tooraj & Orea, Luis & Pollitt, Michael, 2012. "Estimating the marginal cost of quality improvements: The case of the UK electricity distribution companies," Energy Economics, Elsevier, vol. 34(5), pages 1498-1506.
  11. Jamasb, Tooraj & Nillesen, Paul & Pollitt, Michael, 2004. "Strategic behaviour under regulatory benchmarking," Energy Economics, Elsevier, vol. 26(5), pages 825-843, September.

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