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Product-Market Competition in the Water Industry: Voluntarily Nondiscriminatory Pricing

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  • Reto Föllmi
  • Urs Meister

Abstract

This paper presents an attempt to create competition in the water market by means of direct competition. We argue that the usual liberalisation device, competition for the market by franchise bidding, is problematic due to the particular features of the water industry. Our approach proposes the implementation of product market competition, i.e. competition in the market. In such a situation several water utilities using a single set of pipes compete for customers in the same area. Since the water industry is often characterised by local networks, we consider a simple model, where competition is introduced between vertically integrated, neighbouring water suppliers that connect their networks. Even without any regulation, we show that: (i) An inefficient incumbent will give up its monopoly position and lower the access price far enough so that the low-cost competitor can enter his home market. (ii) Efficiency of production will rise due to liberalisation. (iii) In contrary to prejudicial claims, investment incentives are not destroyed by the introduction of competition. Investments of low-cost firms may even increase.

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Bibliographic Info

Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 115.

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Handle: RePEc:zur:iewwpx:115

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Keywords: Product-Market Competition; Water; Nondiscriminatory pricing;

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Citations

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Cited by:
  1. Föllmi, Reto & Meister, Urs, 2011. "Enhancing the Efficiency of Water Supply: Product Market Competition versus Trade," Economics Working Paper Series 1121, University of St. Gallen, School of Economics and Political Science.
  2. Reto Foellmi & Urs Meister, 2004. "Enhancing Efficiency of Water Supply - Product Market Compoetition versus Trade," Working Papers, University of Zurich, Institute for Strategy and Business Economics (ISU) 0025, University of Zurich, Institute for Strategy and Business Economics (ISU).
  3. Mehdi Farsi & Aurelio Fetz & Massimo Filippini, 2007. "Economies of Scale and Scope in the Swiss Multi-Utilities Sector," CEPE Working paper series, CEPE Center for Energy Policy and Economics, ETH Zurich 07-59, CEPE Center for Energy Policy and Economics, ETH Zurich.
  4. Vinnari, Eija M., 2006. "The economic regulation of publicly owned water utilities: The case of Finland," Utilities Policy, Elsevier, Elsevier, vol. 14(3), pages 158-165, September.

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