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

  • Reto Foellmi
  • Urs Meister

    ()

    (Institute for Empirical Research in Economics, University of Zurich
    Institute for Strategy and Business Economics, University of Zurich)

Since franchise bidding in the piped water industry is problematic due to extensive investment requirements, product-market competition or common carriage is a valuable alternative for the introduction of competition. This paper analyses product-market competition by considering a simple model of interconnection where competition is introduced between vertically integrated neighbouring water suppliers. The model contains water markets specificities such as local and decentralised networks and related difficulties of regulating access charges. 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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Paper provided by University of Zurich, Institute for Strategy and Business Economics (ISU) in its series Working Papers with number 0032.

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Date of creation: 2004
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Publication status: Published in: Journal of Industry, Competition and Trade 5(2), 115-135, 2005
Handle: RePEc:iso:wpaper:0032
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