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Subadditivity Tests for Network Separation with an Application to US Railroads

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Author Info
Ivaldi, Marc
McCullough, Gerard

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Abstract

We describe a pair of subadditivity tests that can be used to evaluate the technological feasibility of separating a vertically integrated network monopoly into a common infrastructure component and competing operating components. We implement the tests with a Generalized McFadden cost function that is globally concave in input prices and permits the assignment of zero output values without losing its flexibility properties. The tests shed light on the respective roles of regulation and competition policy. We illustrate them with an analysis of US freight railroads for the period 1978-2001 and find both vertical and horizontal economies of scope.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4392.

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Date of creation: May 2004
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Handle: RePEc:cpr:ceprdp:4392

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Related research
Keywords: networks; railroads; regulation; subadditivity; vertical integration;

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Find related papers by JEL classification:
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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  1. McFadden, Daniel, 1978. "Cost, Revenue, and Profit Functions," Histoy of Economic Thought Chapters, in: Fuss, Melvyn & McFadden, Daniel (ed.), Production Economics: A Dual Approach to Theory and Applications, volume 1, chapter 1 McMaster University Archive for the History of Economic Thought. [Downloadable!]
  2. Wilson, Wesley W, 1997. "Cost Savings and Productivity in the Railroad Industry," Journal of Regulatory Economics, Springer, vol. 11(1), pages 21-40, January. [Downloadable!] (restricted)
  3. Baumol, William J, 1977. "On the Proper Cost Tests for Natural Monopoly in a Multiproduct Industry," American Economic Review, American Economic Association, vol. 67(5), pages 809-22, December. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
  5. Russell Pittman, 2005. "Structural Separation to Create Competition? The Case of Freight Railways," Review of Network Economics, Concept Economics, vol. 4(3), pages 181-196, September. [Downloadable!]
  6. Roller, Lars-Hendrik, 1990. "Proper Quadratic Cost Functions with an Application to the Bell System," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 202-10, May. [Downloadable!] (restricted)
  7. 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, Blackwell Publishing, vol. 39(5), pages 483-502, September. [Downloadable!] (restricted)
  8. Diewert, Walter E & Wales, Terence J, 1987. "Flexible Functional Forms and Global Curvature Conditions," Econometrica, Econometric Society, vol. 55(1), pages 43-68, January. [Downloadable!] (restricted)
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  9. 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. [Downloadable!] (restricted)
  10. Panzar, John C., 1989. "Technological determinants of firm and industry structure," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 1, pages 3-59 Elsevier. [Downloadable!] (restricted)
  11. Ellig, Jerry, 2002. "Railroad Deregulation and Consumer Welfare," Journal of Regulatory Economics, Springer, vol. 21(2), pages 143-67, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Christian Growitsch & Heike Wetzel, 2006. "Economies of Scope in European Railways: An Efficiency Analysis," IWH Discussion Papers 5-06, Halle Institute for Economic Research. [Downloadable!]
  2. Russell Pittman, 2007. "Make or buy on the Russian railway? Coase, Williamson, and Tsar Nicholas II," Economic Change and Restructuring, Springer, vol. 40(3), pages 207-221, September. [Downloadable!] (restricted)
  3. Russell Pittman & Sergei Guriev & Guido Friebel & Anna Tomova & Elizaveta Cheviakhova, 2005. "Railroad Restructuring in Russia and Central and Eastern Europe: One Solution for All Problems?," Industrial Organization 0504021, EconWPA. [Downloadable!]
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