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Reforming a network industry: consequences for cost efficiency and welfare

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  • Johan WILLNER

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  • Sonja GRÖNBLOM
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    Abstract

    To 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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    File URL: http://wp.demm.unimi.it/tl_files/wp/2011/DEMM-2011_033wp.pdf
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    Bibliographic Info

    Paper 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.

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    Date of creation: 30 Nov 2011
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    Handle: RePEc:mil:wpdepa:2011-33

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    Related research

    Keywords: Liberalisation; privatisation; vertical separation; cost efficiency;

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