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Economies of Scale and Scope in Network Industries: Lessons for the UK water and sewerage sectors

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  • Pollitt, M. J.
  • Steer, S. J.

Abstract

Many studies of the water and sewerage industries place significant importance on the benefits of economies of scale and scope and how these relate to vertically integrated firms. We have re-examined the early literature on scale and scope economies and find that these studies do not implicitly preclude non-integrated firms from fully utilising assets for multi-product activities; they can still reap scope economies through trading in the open market. Further, we demonstrate difficulties in separating these two types of economies when assessing firm performance. Trade-offs between governance and production costs are a key issue in determining the value of vertically integrated firms that may undergo divestiture. We discuss the present policy debate regarding the optimal structure of the water and sewerage markets in England and Wales in the light of this, and recommend avenues of research that will help determine the optimal policy.

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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1152.

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Date of creation: 17 Aug 2011
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Handle: RePEc:cam:camdae:1152

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  1. Nancy L. Rose & Andrea Shepard, 1997. "Firm Diversification and CEO Compensation: Managerial Ability or Executive Entrenchment?," RAND Journal of Economics, The RAND Corporation, vol. 28(3), pages 489-514, Autumn.
  2. George J. Stigler, 1951. "The Division of Labor is Limited by the Extent of the Market," Journal of Political Economy, University of Chicago Press, vol. 59, pages 185.
  3. Newbery, David M & Pollitt, Michael G, 1997. "The Restructuring and Privatization of Britain's CEGB--Was It Worth It?," Journal of Industrial Economics, Wiley Blackwell, vol. 45(3), pages 269-303, September.
  4. Pollitt, M., 2007. "The arguments for and against ownership unbundling of energy transmission networks," Cambridge Working Papers in Economics 0737, Faculty of Economics, University of Cambridge.
  5. John Kwoka, 2008. "Restructuring the U.S. Electric Power Sector: A Review of Recent Studies," Review of Industrial Organization, Springer, vol. 32(3), pages 165-196, May.
  6. Teece, David J., 1980. "Economies of scope and the scope of the enterprise," Journal of Economic Behavior & Organization, Elsevier, vol. 1(3), pages 223-247, September.
  7. Gilland, Bernard, 2002. "World population and food supply: can food production keep pace with population growth in the next half-century?," Food Policy, Elsevier, vol. 27(1), pages 47-63, February.
  8. P. Nillesen & M. Pollitt, 2010. "Using Regulatory Benchmarking Techniques to Set Company Performance Targets: The Case of Us Electricity," Competition and Regulation in Network Industries, Intersentia, vol. 11(1), pages 50-85, March.
  9. Garcia, Serge & Moreaux, Michel & Reynaud, Arnaud, 2007. "Measuring economies of vertical integration in network industries: An application to the water sector," International Journal of Industrial Organization, Elsevier, vol. 25(4), pages 791-820, August.
  10. Willig, Robert D, 1979. "Multiproduct Technology and Market Structure," American Economic Review, American Economic Association, vol. 69(2), pages 346-51, May.
  11. Pollitt, M.G., 1999. "A survey of the liberalisation of public enterprises in the UK since 1979," Cambridge Working Papers in Economics 9901, Faculty of Economics, University of Cambridge.
  12. Kwoka, J. & Ozturk, S. & Pollitt, M.G., 2008. "Divestiture Policy and Operating Efficiency in U.S. Electric Power Distribution," Cambridge Working Papers in Economics 0835, Faculty of Economics, University of Cambridge.
  13. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
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