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Competition in network industries

Author

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  • Klein, Michael

Abstract

A wave of privatization is sweeping the globe, affecting about 100 countries and adding up to an average of more than $60 billion a year in business in the past decade. The challenge is to ensure that privatization yields clear benefits. Empirical studies suggest that ownership change by itself will often yield results, especially when it reduces government interference. But the regulation required in areas of natural monopoly can become overly intrusive and undermine progress. Real competition is required to generate sizable and lasting welfare improvements. But in infrastructure sectors, the introduction of competition is complicated by the existence of complex transport and communications networks. Debate about whether and how to introduce competition in network industries is sometimes heated. Certain questions recur: Will continuing regulation be needed? Whether and at what terms will private finance be forthcoming? The author argues that policymakers need to understand how competitive forces can be brought to bear in network industries. He explains the following: 1) common principles that are often lost in"technical"debates about specific sectors; 2) various methods for introducing competition in network industries; 3) competition for the market, and bidding for franchises; 4) options for competition for existing networks; 5) options for expanding competitive systems by decentralizing investment in new network capacity; 6) the option of allowing competition among multiple networks; and 7) the implications of these options for the sectors and for financing industry expansion. In case of doubt, he contends, policymakers should not restrict the entry of competitive firms in such networks. If they do, entry restrictions should be subject to an automatic test after a set period, and reviewed for costs and benefits.

Suggested Citation

  • Klein, Michael, 1996. "Competition in network industries," Policy Research Working Paper Series 1591, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1591
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    References listed on IDEAS

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    1. Nicholas Economides, 1997. "The Economics of Networks," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco, vol. 1(0), December.
    2. Winston, Clifford, 1993. "Economic Deregulation: Days of Reckoning for Microeconomists," Journal of Economic Literature, American Economic Association, vol. 31(3), pages 1263-1289, September.
    3. McCabe, Kevin A. & Rassenti, Stephen J. & Smith, Vernon L., 1990. "Auction design for composite goods : The natural gas industry," Journal of Economic Behavior & Organization, Elsevier, vol. 14(1), pages 127-149, September.
    4. Michael L. Katz & Carl Shapiro, 1994. "Systems Competition and Network Effects," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 93-115, Spring.
    5. J. Gregory Sidak & William Baumol, 1994. "Toward Competition in Local Telephony," Books, American Enterprise Institute, number 52984, July.
    6. Cave, Martin & Doyle, Chris, 1994. "Access pricing in network utilities in theory and practice," Utilities Policy, Elsevier, vol. 4(3), pages 181-189, July.
    7. Vickers, John, 1995. "Concepts of Competition," Oxford Economic Papers, Oxford University Press, vol. 47(1), pages 1-23, January.
    8. Kenneth E. Train, 1991. "Optimal Regulation: The Economic Theory of Natural Monopoly," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200848, January.
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    Citations

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    Cited by:

    1. Michele Moretto & Cesare Dosi, 2007. "Concession Bidding Rules and Investment Time Flexibility," Working Papers 2007.3, Fondazione Eni Enrico Mattei.
    2. Nasser, Thomas-Olivier, 1998. "Congestion pricing and network expansion," Policy Research Working Paper Series 1896, The World Bank.
    3. Crampes, Claude & Estache, Antonio, 1998. "Regulatory trade-offs in the design of concession contracts," Utilities Policy, Elsevier, vol. 7(1), pages 1-13, March.
    4. Rosellon, Juan & Halpern, Jonathan, 2004. "Designing natural gas distribution concessions in a megacity: tradeoffs beetween scale economies and information disclosure in Mexico City," Policy Research Working Paper Series 2538, The World Bank.
    5. Dosi, Cesare & Moretto, Michele, 2006. "Concession Bidding Rules and Investment Time Flexibility," Conference Papers 6630, University of Minnesota, Center for International Food and Agricultural Policy.
    6. Guasch, J Luis & Hahn, Robert W, 1999. "The Costs and Benefits of Regulation: Implications for Developing Countries," World Bank Research Observer, World Bank Group, vol. 14(1), pages 137-158, February.
    7. Mark Casson, 2009. "The Efficiency of the Victorian British Railway Network: A Counterfactual Analysis," Networks and Spatial Economics, Springer, vol. 9(3), pages 339-378, September.
    8. Clive Harris, 2003. "Private Participation in Infrastructure in Developing Countries : Trends, Impacts, and Policy Lessons," World Bank Publications, The World Bank, number 15124, December.
    9. Eduardo Saavedra & Xavier Mancero, "undated". "Entry, Cream Skimming, and Competition: Theory and Simulation for Chile's Local Telephony Market," ILADES-Georgetown University Working Papers inv132, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
    10. J.A. den Hertog, 2010. "Review of economic theories of regulation," Working Papers 10-18, Utrecht School of Economics.

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