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The Appropriateness of the Poolability Assumption for Multiproduct Technologies: Evidence from the English Water and Sewerage Utilities

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  • Anna Bottasso
  • Maurizio Conti
  • Massimiliano Piacenza
  • Davide Vannoni

Abstract

The empirical literature on the cost structure of multiproduct firms (e.g., public utilities providing in combination gas, water, and electricity) traditionally assumes a common technology across different products and stages of production, letting the issue of poolability unexplored. The appropriateness of this assumption is tested here by estimating a General cost function for samples of UK specialized and sewerage-diversified water utilities. The results show the existence of both aggregate scale economies and diseconomies of scope; more interestingly, the hypothesis that the two groups of water companies share the same technological parameters is rejected. Given the implications of this finding in terms of optimal industry configuration and possible restructuring policies (e.g., mergers and/or divestitures), our test suggests caution in pooling samples when undertaking empirical studies on data which refer to multiproduct technologies.

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Bibliographic Info

Paper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 183.

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Length: 17 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:cca:wpaper:183

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Keywords: Multiproduct technologies; Water and sewerage utilities; Poolability; General cost function;

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  1. Giovanni Fraquelli & Massimiliano Piacenza & Davide Vannoni, 2005. "Cost Savings From Generation and Distribution with an Application to Italian Electric Utilities," Journal of Regulatory Economics, Springer, vol. 28(3), pages 289-308, November.
  2. 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.
  3. Ivaldi, M & McCullough, G J, 2001. "Density and Integration Effects on Class I U.S. Freight Railroads," Journal of Regulatory Economics, Springer, vol. 19(2), pages 161-82, March.
  4. Kaserman, David L & Mayo, John W, 1991. "The Measurement of Vertical Economies and the Efficient Structure of the Electric Utility Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 39(5), pages 483-502, September.
  5. Mehdi Farsi & Aurelio Fetz & Massimo Filippini, 2007. "Economies of Scale and Scope in the Swiss Multi-Utilities Sector," CEPE Working paper series 07-59, CEPE Center for Energy Policy and Economics, ETH Zurich.
  6. Pulley, Lawrence B & Braunstein, Yale M, 1992. "A Composite Cost Function for Multiproduct Firms with an Application to Economies of Scope in Banking," The Review of Economics and Statistics, MIT Press, vol. 74(2), pages 221-30, May.
  7. Hunt, Lester C & Lynk, Edward L, 1995. "Privatisation and Efficiency in the UK Water Industry: An Empirical Analysis," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 57(3), pages 371-88, August.
  8. Christensen, Laurits R & Greene, William H, 1976. "Economies of Scale in U.S. Electric Power Generation," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 655-76, August.
  9. Marcelo Resende, 2006. "Efficiency Measurement and Regulation in U.S. Telecommunications: A Robustness Analysis," Economics Working Papers ECO2006/15, European University Institute.
  10. Quinn Weninger, 2003. "Estimating multiproduct costs when some outputs are not produced," Empirical Economics, Springer, vol. 28(4), pages 753-765, November.
  11. Piacenza, Massimiliano & Vannoni, Davide, 2004. "Choosing among alternative cost function specifications: an application to Italian multi-utilities," Economics Letters, Elsevier, vol. 82(3), pages 415-422, March.
  12. Massimiliano Piacenza & Davide Vannoni, 2009. "Vertical And Horizontal Economies In The Electric Utility Industry: An Integrated Approach," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 80(3), pages 431-450, 09.
  13. Richard T. Shin & John S. Ying, 1992. "Unnatural Monopolies in Local Telephone," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 171-183, Summer.
  14. Murillo-Zamorano, Luis R. & Vega-Cervera, Juan A., 2001. "The use of parametric and non-parametric frontier methods to measure the productive efficiency in the industrial sector: A comparative study," International Journal of Production Economics, Elsevier, vol. 69(3), pages 265-275, February.
  15. Mehdi Farsi & Massimo Filippini, 2008. "An Analysis of Cost-Efficiency in Swiss Multi-utilities," CEPE Working paper series 08-60, CEPE Center for Energy Policy and Economics, ETH Zurich.
  16. Kapetanios, George, 2006. "Cluster analysis of panel data sets using non-standard optimisation of information criteria," Journal of Economic Dynamics and Control, Elsevier, vol. 30(8), pages 1389-1408, August.
  17. Bottasso, Anna & Conti, Maurizio, 2009. "Scale economies, technology and technical change in the water industry: Evidence from the English water only sector," Regional Science and Urban Economics, Elsevier, vol. 39(2), pages 138-147, March.
  18. Anna Bottasso & Maurizio Conti, 2009. "Price cap regulation and the ratchet effect: a generalized index approach," Journal of Productivity Analysis, Springer, vol. 32(3), pages 191-201, December.
  19. Tsionas, Efthymios G. & Loizides, John, 2001. "A note on joint estimation of scale economies and productivity growth parameters," International Journal of Production Economics, Elsevier, vol. 70(1), pages 37-43, March.
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Cited by:
  1. Anna Bottasso & Maurizio Conti, 2009. "Price cap regulation and the ratchet effect: a generalized index approach," Journal of Productivity Analysis, Springer, vol. 32(3), pages 191-201, December.
  2. Thomas Triebs & David S. Saal & Pablo Arocena & Subal C. Kumbhakar, 2012. "Estimating Economies of Scale and Scope with Flexible Technology," Ifo Working Paper Series Ifo Working Paper No. 142, Ifo Institute for Economic Research at the University of Munich.
  3. Eiji Satoh, 2012. "Consolidation and Scale Economies in the Japanese Sewerage Industry," Global COE Hi-Stat Discussion Paper Series gd12-240, Institute of Economic Research, Hitotsubashi University.

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