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Reforming a network industry: consequences for cost efficiency and welfare

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  • Johan Willner
  • Sonja Grönblom

Abstract

Competition in an industry with an upstream natural monopoly infrastructure requires vertical separation. However, this cannot increase welfare unless marginal costs are reduced, given the advantages of vertical integration. It turns out that entry increases marginal costs and has ambiguous welfare effects if there is a downstream agency problem, and reduces marginal costs and increases welfare if it occurs upstream. While vertical separation and competition are outperformed even by a profit-maximising monopoly, a welfare-maximising vertically integrated monopoly yields, in both cases, superior cost efficiency and welfare.

Suggested Citation

  • Johan Willner & Sonja Grönblom, 2013. "Reforming a network industry: consequences for cost efficiency and welfare," International Review of Applied Economics, Taylor & Francis Journals, vol. 27(2), pages 265-284, March.
    • Handle: RePEc:taf:irapec:v:27:y:2013:i:2:p:265-284
    DOI: 10.1080/02692171.2012.734789
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    References listed on IDEAS

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    Cited by:

    1. Fiorio, Carlo V. & Florio, Massimo & Perucca, Giovanni, 2013. "User satisfaction and the organization of local public transport: Evidence from European cities," Transport Policy, Elsevier, vol. 29(C), pages 209-218.

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