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Economies of scale and scope in network industries: Lessons for the UK water and sewerage sectors

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  • Pollitt, Michael G.
  • Steer, Steven J.

Abstract

Many studies of the water and sewerage industries place significant importance on the benefits of economies of scale and scope and how these relate to vertically integrated firms. We have re-examined the early literature on scale and scope economies and find that these studies do not implicitly preclude non-integrated firms from fully utilising assets for multi-product activities; they can still reap scope economies through trading in the open market. Further, we demonstrate difficulties in separating these two types of economies when assessing firm performance. Trade-offs between governance and production costs are a key issue in determining the value of vertically integrated firms that may undergo divestiture. We discuss the present policy debate regarding the optimal structure of the water and sewerage markets in England and Wales in the light of this, and recommend avenues of research that will help determine the optimal policy.

Suggested Citation

  • Pollitt, Michael G. & Steer, Steven J., 2012. "Economies of scale and scope in network industries: Lessons for the UK water and sewerage sectors," Utilities Policy, Elsevier, vol. 21(C), pages 17-31.
  • Handle: RePEc:eee:juipol:v:21:y:2012:i:c:p:17-31 DOI: 10.1016/j.jup.2011.12.004
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    1. Kibae Kim & Songhee Kang & Jorn Altmann, 2014. "Cloud Goliath Versus a Federation of Cloud Davids: Survey of Economic Theories on Cloud Federation," TEMEP Discussion Papers 2014117, Seoul National University; Technology Management, Economics, and Policy Program (TEMEP), revised Jul 2014.

    More about this item

    Keywords

    Economies of scale; Economies of scope; Water and sewerage; UK; Network industries; Ownership structure;

    JEL classification:

    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities

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