Reforming a network industry: consequences for cost efficiency and welfare
AbstractTo introduce competition in an industry with an upstream natural monopoly infrastructure requires vertical separation. However, given the well-known advantages of vertical integration, such a reform would have to reduce costs in order to increase social welfare. We ask whether this would be the case if marginal costs depend on a downstream agency problem. It turns out that the opposite holds true. While entry after vertical separation can be beneficial despite higher costs, the best solution in terms of cost efficiency and welfare tends to be a welfare-maximising vertically integrated or bilateral monopoly. Vertical separation and competition are outperformed even by a profit-maximising integrated monopoly.
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Bibliographic InfoPaper provided by Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano in its series Departmental Working Papers with number 2011-33.
Date of creation: 30 Nov 2011
Date of revision:
Liberalisation; privatisation; vertical separation; cost efficiency;
Find related papers by JEL classification:
- L32 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Enterprises; Public-Private Enterprises
- L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out
- L44 - Industrial Organization - - Antitrust Issues and Policies - - - Antitrust Policy and Public Enterprise, Nonprofit Institutions, and Professional Organizations
- H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
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