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Economies of Scale and Scope in Network Industries: Lessons for the UK water and sewerage sectors

Author

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  • Michael G. Pollitt

    (ESRC Electricity Policy Research Group)

  • Stephen J. Steer

    (ESRC Electricity Policy Research Group)

Abstract

Many studies of the water and sewerage industries place significant importance on the benefits of economies of scale and scope and how these relate to vertically integrated firms. We have re-examined the early literature on scale and scope economies and find that these studies do not implicitly preclude non-integrated firms from fully utilising assets for multi-product activities; they can still reap scope economies through trading in the open market. Further, we demonstrate difficulties in separating these two types of economies when assessing firm performance. Trade-offs between governance and production costs are a key issue in determining the value of vertically integrated firms that may undergo divestiture. We discuss the present policy debate regarding the optimal structure of the water and sewerage markets in England and Wales in the light of this, and recommend avenues of research that will help determine the optimal policy.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Michael G. Pollitt & Stephen J. Steer, 2011. "Economies of Scale and Scope in Network Industries: Lessons for the UK water and sewerage sectors," Working Papers EPRG 1124, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    • Handle: RePEc:enp:wpaper:eprg1124
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    References listed on IDEAS

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    2. Gerli, Paolo & Van der Wee, Marlies & Verbrugge, Sofie & Whalley, Jason, 2018. "The involvement of utilities in the development of broadband infrastructure: A comparison of EU case studies," Telecommunications Policy, Elsevier, vol. 42(9), pages 726-743.
    3. Byoung-Kuk Ju & Seung-Hoon Yoo & Chulwoo Baek, 2022. "Economies of Scale in City Gas Sector in Seoul, South Korea: Evidence from an Empirical Investigation," Sustainability, MDPI, vol. 14(9), pages 1-14, April.
    4. Kibae Kim & Songhee Kang & Jorn Altmann, 2014. "Cloud Goliath Versus a Federation of Cloud Davids: Survey of Economic Theories on Cloud Federation," TEMEP Discussion Papers 2014117, Seoul National University; Technology Management, Economics, and Policy Program (TEMEP), revised Jul 2014.
    5. Nakatani, Ryota, 2022. "Productivity drivers of infrastructure companies: network industries to maximize economies of scale in the digital era," MPRA Paper 115531, University Library of Munich, Germany.
    6. Hellwig, Michael & Polk, Andreas, 2021. "Do political links influence water prices? Determinants of water prices in Germany," Utilities Policy, Elsevier, vol. 70(C).
    7. Klien, Michael & Michaud, David, 2019. "Water utility consolidation: Are economies of scale realized?," Utilities Policy, Elsevier, vol. 61(C).
    8. Atif Ansar & Bent Flyvbjerg, 2022. "How to solve big problems: bespoke versus platform strategies," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 38(2), pages 338-368.
    9. Agustin Leon-Moreta & Vittoria Totaro, 2023. "Interlocal interactions, municipal boundaries and water and wastewater expenditure in city-regions," Urban Studies, Urban Studies Journal Limited, vol. 60(1), pages 46-66, January.
    10. Anna Bottasso & Maurizio Conti, 2021. "Economie di integrazione verticale ed economie di scopo nel settore idrico e fognario: alcune considerazioni alla luce dell?evidenza empirica internazionale," ECONOMIA PUBBLICA, FrancoAngeli Editore, vol. 2021(3), pages 89-128.
    11. Bennich, Amelie & Engwall, Mats & Nilsson, David, 2023. "Operating in the shadowland: Why water utilities fail to manage decaying infrastructure," Utilities Policy, Elsevier, vol. 82(C).

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    More about this item

    Keywords

    Economies of scale and scope; vertical separation; water and sewerage;
    All these keywords.

    JEL classification:

    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities

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