Reforming a Network Industry: Consequences for Cost Efficiency and Welfare

D4 Published development or research report or study

Internal Authors/Editors

Publication Details

List of Authors: Willner Johan, Grönblom Sonja
Publisher: Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano
Publication year: 2011
Start page: 1
End page: 31


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.

Last updated on 2020-08-04 at 05:13