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A Test for Natural Monopoly with Application to Norwegian Electricity Distribution

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  • Kjell G. Salvanes
  • Sigve Tjøtta

Abstract

Reorganization of public utilities is on the current political agenda in many European countries. However, in many cases the most fundamental question in terms of public policy towards these industries is not tested; does the underlying cost structure indicate a natural monopoly or not? Evans and Heckman's analysis of the US Bell System is one of the few exceptions, but their method has a serious problem as their estimated cost function is not well behaved (negative marginal costs). To solve this problem we propose to use the consistency region (i.e., the region where the estimated cost function is well behaved) as the test region. We apply our testing procedure to Norwegian electricity distribution and find that local electricity distribution is characterised as a natural monopoly. Policy implications of the result is also discussed.

Suggested Citation

  • Kjell G. Salvanes & Sigve Tjøtta, 1998. "A Test for Natural Monopoly with Application to Norwegian Electricity Distribution," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 13(6), pages 669-685, December.
  • Handle: RePEc:kap:revind:v:13:y:1998:i:6:p:669-685
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    References listed on IDEAS

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    Cited by:

    1. Orea, Luis & Growitsch, Christian & Jamasb, Tooraj, 2012. "Using Supervised Environmental Composites in Production and Efficiency Analyses: An Application to Norwegian Electricity Networks," EWI Working Papers 2012-18, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    2. Jamasb, Tooraj & Orea, Luis & Pollitt, Michael, 2012. "Estimating the marginal cost of quality improvements: The case of the UK electricity distribution companies," Energy Economics, Elsevier, vol. 34(5), pages 1498-1506.
    3. Dominik Schober, 2013. "Refinancing under Yardstick Regulation with Investment Cycles–The Case of Long-Lived Electricity Network Assets," EWL Working Papers 1321, University of Duisburg-Essen, Chair for Management Science and Energy Economics, revised Jun 2013.
    4. Jamasb, T. & Nillesen, P. & Pollitt, M., 2003. "Strategic Behaviour under Regulation Benchmarking," Cambridge Working Papers in Economics 0312, Faculty of Economics, University of Cambridge.
    5. Bloch, Harry, et al, 2001. "The Cost Structure of Australian Telecommunications," The Economic Record, The Economic Society of Australia, vol. 77(239), pages 338-350, December.
    6. Schober, Dominik & Weber, Christoph, 2015. "Refinancing under yardstick regulation with investment cycles: The case of long-lived electricity network assets," ZEW Discussion Papers 15-065, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    7. Christian Growitsch & Tooraj Jamasb & Michael Pollitt, 2009. "Quality of service, efficiency and scale in network industries: an analysis of European electricity distribution," Applied Economics, Taylor & Francis Journals, vol. 41(20), pages 2555-2570.
    8. A. Yatchew, 2000. "Scale economies in electricity distribution: a semiparametric analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(2), pages 187-210.
    9. Paul Nillesen & Michael Pollitt, 2011. "Ownership Unbundling in Electricity Distribution: Empirical Evidence from New Zealand," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 38(1), pages 61-93, January.
    10. Mancuso, Paolo, 2012. "Regulation and efficiency in transition: The case of telecommunications in Italy," International Journal of Production Economics, Elsevier, vol. 135(2), pages 762-770.
    11. Jamasb, T. & Orea, L. & Pollitt, M.G., 2010. "Estimating Marginal Cost of Quality Improvements: The Case of the UK Electricity Distribution Companies," Cambridge Working Papers in Economics 1052, Faculty of Economics, University of Cambridge.
    12. Giovanni Fraquelli & Massimiliano Piacenza & Davide Vannoni, 2004. "Scope and scale economies in multi-utilities: evidence from gas, water and electricity combinations," Applied Economics, Taylor & Francis Journals, vol. 36(18), pages 2045-2057.
    13. Jamasb, Tooraj & Nillesen, Paul & Pollitt, Michael, 2004. "Strategic behaviour under regulatory benchmarking," Energy Economics, Elsevier, vol. 26(5), pages 825-843, September.
    14. John Kwoka, 2005. "Electric power distribution: economies of scale, mergers, and restructuring," Applied Economics, Taylor & Francis Journals, vol. 37(20), pages 2373-2386.
    15. Orea, Luis & Jamasb, Tooraj, 2014. "Identifying efficient regulated firms with unobserved technological heterogeneity: A nested latent class approach to Norwegian electricity distribution networks," Efficiency Series Papers 2014/03, University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG).
    16. Saplacan, Roxana, 2008. "Competition in electricity distribution," Utilities Policy, Elsevier, vol. 16(4), pages 231-237, December.
    17. Nykamp, Stefan & Andor, Mark & Hurink, Johann L., 2012. "‘Standard’ incentive regulation hinders the integration of renewable energy generation," Energy Policy, Elsevier, vol. 47(C), pages 222-237.

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