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Scope and scale economies in multi-utilities: evidence from gas, water and electricity combinations

  • Giovanni Fraquelli
  • Massimiliano Piacenza
  • Davide Vannoni

Within the recent debate on liberalization of local public services, the paper investigates the cost properties of a sample of Italian public utilities providing in combination gas, water and electricity. The estimates from a Composite Cost Function econometric model (Pulley and Braunstein, 1992) are compared with the ones coming from other traditional functional forms such as the Standard Translog, the Generalized Translog, and the Separable Quadratic. The results highlight the presence of global scope and scale economies only for multi-utilities with output levels lower than the ones characterizing the 'median' firm. This indicates that relatively small specialized firms would benefit from cost reductions by evolving into multi-utilities providing similar network services such as gas, water and electricity. However, for larger-scale utilities the hypothesis of null cost advantages is not rejected. Thus, it is possible that the recent diversification waves of leading companies are explained by factors other than cost synergies, so that the welfare gains that can be reasonably expected from such examples of horizontal integration, if any, are likely to be very low.

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Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 36 (2004)
Issue (Month): 18 ()
Pages: 2045-2057

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Handle: RePEc:taf:applec:v:36:y:2004:i:18:p:2045-2057
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  1. Harry Bloch & Gary Madden & Scott Savage, 2001. "Economies of Scale and Scope in Australian Telecommunications," Review of Industrial Organization, Springer, vol. 18(2), pages 219-227, March.
  2. Gasmi, Farid & Laffont, Jean-Jacques & Vuong, Quang, 1992. "Econometric Analysis of Collusive Behavior in a Soft Drink Market," IDEI Working Papers 16, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. McKillop, Donal G. & Glass, J. Colin & Morikawa, Yukio, 1996. "The composite cost function and efficiency in giant Japanese banks," Journal of Banking & Finance, Elsevier, vol. 20(10), pages 1651-1671, December.
  4. Kjell G. Salvanes & Sigve Tjøtta, 1998. "A Test for Natural Monopoly with Application to Norwegian Electricity Distribution," Review of Industrial Organization, Springer, vol. 13(6), pages 669-685, December.
  5. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
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