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Consolidating the Water Industry: an Analysis of the Potential Gains from Horizontal Integration in a Conditional Efficiency Framework

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  • Zschille, Michael

Abstract

The German potable water supply industry is regarded highly fragmented, thus preventing efficiency improvements that could happen through consolidation. Focusing on a hypothetical restructuring of the industry, we use a cross-section sample of 364 German water utilities in 2006, applying Data Envelopment Analysis, to analyze the potential efficiency gains from hypothetical mergers between water utilities at the county level. A conditional efficiency framework is applied to account for the water utilities' operating environments. A conditional order-m approach is applied for the detection of potential outlying observations. Merger gains are decomposed into a technical efficiency effect, a harmony effect and a scale effect. The greatest efficiency improvement potentials turn out to result from reducing individual inefficiencies while pure merger gains are found to be low. The results suggest improving incentives for efficient operations in water supply and a consolidation of the smallest water utilities.

Suggested Citation

  • Zschille, Michael, 2015. "Consolidating the Water Industry: an Analysis of the Potential Gains from Horizontal Integration in a Conditional Efficiency Framework," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 44(1), pages 97-114.
    • Handle: RePEc:zbw:espost:144804
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    Cited by:

    1. Agrell, Per J. & Teusch, Jonas, 2020. "Predictability and strategic behavior under frontier regulation," Energy Policy, Elsevier, vol. 137(C).
    2. Bădin, Luiza & Daraio, Cinzia & Simar, Léopold, 2019. "A bootstrap approach for bandwidth selection in estimating conditional efficiency measures," European Journal of Operational Research, Elsevier, vol. 277(2), pages 784-797.
    3. Jianhui Xie & Xiaoxuan Zhu & Liang Liang, 2020. "A multiplicative method for estimating the potential gains from two-stage production system mergers," Annals of Operations Research, Springer, vol. 288(1), pages 475-493, May.
    4. Ying Li & Yung-Ho Chiu & Tai-Yu Lin & Tzu-Han Chang, 2020. "Pre-Evaluating the Technical Efficiency Gains from Potential Mergers and Acquisitions in the IC Design Industry," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 19(02), pages 525-559, April.
    5. Hellwig, Michael & Polk, Andreas, 2021. "Do political links influence water prices? Determinants of water prices in Germany," Utilities Policy, Elsevier, vol. 70(C).
    6. Nickolaos G. Tzeremes, 2019. "Technological change, technological catch-up and export orientation: evidence from Latin American Countries," Journal of Productivity Analysis, Springer, vol. 52(1), pages 85-100, December.
    7. Chang, Tsung-Sheng & Lin, Ji-Gang & Ouenniche, Jamal, 2023. "DEA-based Nash bargaining approach to merger target selection," European Journal of Operational Research, Elsevier, vol. 305(2), pages 930-945.
    8. Cinzia Daraio & Léopold Simar & Paul W. Wilson, 2020. "Fast and efficient computation of directional distance estimators," Annals of Operations Research, Springer, vol. 288(2), pages 805-835, May.
    9. Michael Zschille, 2016. "Cost Structure and Economies of Scale in German Water Supply," Discussion Papers of DIW Berlin 1576, DIW Berlin, German Institute for Economic Research.
    10. Michael L. Polemis & Thanasis Stengos & Nickolaos G. Tzeremes, 2020. "Modeling the effect of competition on US manufacturing sectors’ efficiency: an order-m frontier analysis," Journal of Productivity Analysis, Springer, vol. 54(1), pages 27-41, August.
    11. Graziano Abrate & Clementina Bruno & Fabrizio Erbetta & Giovanni Fraquelli & Anna Giolitti, 2017. "Efficiency in the Consolidation of the Italian Water Sector," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 31(8), pages 2447-2463, June.
    12. Alexandr Akimov & Paul Simshauser, 2018. "Performance measurement in Australian water utilities: Current state and future directions," Discussion Papers in Finance finance:201802, Griffith University, Department of Accounting, Finance and Economics.
    13. Contreras, I. & Lozano, S., 2022. "Size efficiency, splits and merger gains, and centralized resource reallocation of Spanish public universities," Socio-Economic Planning Sciences, Elsevier, vol. 81(C).
    14. Arocena, Pablo & Saal, David S. & Urakami, Takuya & Zschille, Michael, 2020. "Measuring and decomposing productivity change in the presence of mergers," European Journal of Operational Research, Elsevier, vol. 282(1), pages 319-333.
    15. Devicienti, Francesco & Manello, Alessandro & Vannoni, Davide, 2017. "Technical efficiency, unions and decentralized labor contracts," European Journal of Operational Research, Elsevier, vol. 260(3), pages 1129-1141.
    16. Sebastián Lozano & Belarmino Adenso-Díaz, 2021. "A DEA approach for merging dairy farms," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 67(6), pages 209-219.
    17. Caroline Stiel, 2017. "Modern Public Enterprises: Organisational Innovation and Productivity," Discussion Papers of DIW Berlin 1713, DIW Berlin, German Institute for Economic Research.
    18. Angeliki Flokou & Vassilis Aletras & Dimitris Niakas, 2017. "Decomposition of potential efficiency gains from hospital mergers in Greece," Health Care Management Science, Springer, vol. 20(4), pages 467-484, December.
    19. Tourinho, Marco & Santos, Paulo Rosa & Pinto, Francisco Taveira & Camanho, Ana S., 2022. "Performance assessment of water services in Brazilian municipalities: An integrated view of efficiency and access," Socio-Economic Planning Sciences, Elsevier, vol. 79(C).
    20. Yan He & Yung-ho Chiu & Bin Zhang, 2020. "Prevaluating Technical Efficiency Gains From Potential Mergers and Acquisitions in China’s Coal Industry," SAGE Open, , vol. 10(3), pages 21582440209, July.

    More about this item

    Keywords

    Water Supply; Horizontal Integration; Data Envelopment Analysis; Conditional Efficiency; Nonparametric Estimation;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities

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