Reforming a network industry: consequences for cost efficiency and welfare

Johan Willner () and Sonja Grönblom

Departmental Working Papers from Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano

Abstract: To introduce competition in an industry with an upstream natural monopoly infrastructure requires vertical separation. However, given the well-known advantages of vertical integration, such a reform would have to reduce costs in order to increase social welfare. We ask whether this would be the case if marginal costs depend on a downstream agency problem. It turns out that the opposite holds true. While entry after vertical separation can be beneficial despite higher costs, the best solution in terms of cost efficiency and welfare tends to be a welfare-maximising vertically integrated or bilateral monopoly. Vertical separation and competition are outperformed even by a profit-maximising integrated monopoly.

Keywords: Liberalisation; privatisation; vertical separation; cost efficiency (search for similar items in EconPapers)
JEL-codes: H42 L32 L33 L44 (search for similar items in EconPapers)
Date: 2011-11-30
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