The Role of Informational Rents: Network Utilities and Vertical Structure
Keywords:
informational rents, vertical structure, network utilities, natural monopoly, vertical separationAbstract
This paper presents a theoretical assessment of the efficiency implications of alternative vertical structures in an industry characterized by a natural monopoly, vertically related to potentially competitive markets (network utilities). Based on the incomplete contracts and asymmetric information paradigm, I show that the monopoly’s informational rents vary according to the vertical structure of the industry. This, in turn changes the relative advantages of these alternative structures in terms of their allocative and productive inefficiencies. The main policy conclusion of this paper is that the existence of conglomerates in network industries matters. This paper’s contribution is that its exploration of the issue does not assume that monopolies behave in an uncompetitive fashion toward their rivals, as is common in the literature on this subject. This paper, therefore, offers an economic rationale for vertical separation.Downloads
References
Anderlini, L., & Felli, L. (1994). Incomplete written contracts: Undescribable States of nature. The Quarterly Journal of Economics, 109(4), 1085–1124. https://doi.org/10.2307/2118357
Armstrong, M. (2001). The theory of access pricing and interconnection. In M. Cave, S. Majumdar, and I. Vogelsang eds. Handbook of Telecommunications Economics, North-Holland (forthcoming).
Armstrong, M., Cowan, S., & Vickers, J. (1994). The regulatory reform: Economic analysis and British experience. MIT Press.
Armstrong, M., Doyle, C., & Vickers, J. (1996). The access pricing problem: A synthesis. The Journal of Industrial Economics, 44(2), 131–150. https://doi.org/10.2307/2950642
Baron, D., & Myerson, R. (1982). Regulating a monopoly with unknown costs. Econometrica 50, 911–930.
Basañes, F., Saavedra, E., & Soto, R. (1999). Post-Contractual renegotiations and disputes in Chile. Working Paper IFM-116, Inter-American Development Bank.
Baumol, W. (1983). Some subtle issues in railroad transportation. Journal of Transport Economics 10, 341–355.
Bernheim, B. D., & Whinston, M. (1998). Incomplete contracts and strategic ambiguity. American Economic Review 88, 902–932.
Bhaskar, V. (1993). Privatization in developing countries: Theoretical issues and the experience of Bangladesh. UNCTAD Review, 4.
Bitran, E., & Saavedra, E. (1993). Algunas reflexiones en torno al rol regulador y empresarial del estado. In: O. Muñoz (ed.), Después de las Privatizaciones: Hacia un Estado Regulador. CIEPLAN.
Bös, D. (1994). Privatization: A theoretical treatment. Oxford University Press.
Caillaud, B., Guesnerie, R., Rey, P., & Tirole, J. (1988). Government intervention in production and incentives theory: A review of recent contributions. The RAND Journal of Economics, 19(1), 1–27. https://doi.org/10.2307/2555394
Díaz, C. A., & Soto, R. (2000). Open-Access issues in the Chilean telecommunications and electricity sectors. Working Paper I-121, ILADES-Georgetown University, Universidad Alberto Hurtado.
Galal, A., Jones, L., Tandon, P., & Vogelsang, I. (1994). Welfare consequences of selling public enterprises. The World Bank. https://doi.org/10.1596/0-8213-2976-6
Galetovic, A. (2000). Integración vertical en el sector eléctrico: Una guía para el usuario. Mimeo, Universidad de Chile.
Grossmann, S., & Hart, O. (1986). The costs and benefits of ownership: A theory of vertical and lateral integration. Journal of Political Economy 94, 691–719.
Hart, O., & Moore, J. (1999). Foundations of incomplete contracts. Review of Economic Studies, 66(1), 115–138. https://doi.org/10.1111/1467-937x.00080
Helms, D., & Jenkinson, T. (1998). Competition in regulated industries. Cambridge University Press.
Holmström, B., & Milgrom, P. (1991). Multi-Task principal agent problems: Incentive contracts, asset ownership and job design. Journal of Law, Economics, and Organization 7, Special Issue, 24–52.
Joskow, P. (1985). Vertical integration and long-Term contracts: The cased of coal-Burning electric utilities. Journal of Law, Economics and Organization 1, 33–80.
Laffont, J. J. (1994a). Regulation, privatization, and incentives in developing countries. Mimeo, IDEI and GREMAQ.
Laffont, J. J. (1994b). The new economics of regulation ten years after. Econometrica, 62(3), 507–537. https://doi.org/10.2307/2951658
Laffont, J. J. (1995). Privatization and incentives. Revista Española de Economía, Monográfico: Regulación.
Laffont, J. J., & Laffont, J. J. (1991). Privatization and incentives. The Journal of Law, Economics, and Organization, 7(special_issue), 84–105. https://doi.org/10.1093/jleo/7.special_issue.84
Laffont, J. J., & Tirole, J. (1986). Using cost observation to regulate firms. Journal of Political Economy, 94(3, Part 1), 614–641. https://doi.org/10.1086/261392
Laffont, J. J., & Tirole, J. (1993). A theory of incentives in procurement and regulation. MIT Press.
Laffont, J. J., & Tirole, J. (1994). Access pricing and competition. European Economic Review, 38(9), 1673–1710. https://doi.org/10.1016/0014-2921(94)90046-9
Levy, B., & Spiller, P. (1996). Regulation. Institutions and Commitment. Cambridge University Press.
Newbery, D. M. (1997). Privatisation and liberalisation of network utilities. European Economic Review, 41(3-5), 357–383. https://doi.org/10.1016/s0014-2921(97)00010-x
Newbery, D. (2000). Privatization. Restructuring, and Regulation of Network Utilities. Cambridge University Press.
Perry, M. (1989). Vertical integration: Determinants and effects. In: R. Schmalensee and R. Willig (eds.), Handbook of Industrial Organization, North-Holland.
Saavedra, E. (1999). Alternative institutional arrangements in network utilities: A complete contracting approach. Working Paper I-117, ILADES-Georgetown University, Universidad Alberto Hurtado.
Saavedra, E. (2001). Opportunistic behavior and legal disputes in the Chilean electricity sector. Working Paper I-130, ILADES-Georgetown University, Universidad Alberto Hurtado.
Saavedra, E., & Soto, R. (2000). Reformas económicas e institucionales del estado en América Latina. Working Paper I-128, ILADES-Georgetown University, Universidad Alberto Hurtado.
Sappington, D. E. M., & Stiglitz, J. E. (1987). Privatization, information and incentives. Journal of Policy Analysis and Management, 6(4), 567–582. https://doi.org/10.2307/3323510
Schmidt, K. (1990). The costs and benefits of privatization. Discussion Paper A-287, Bonn University.
Segal, I. (1999). Complexity and renegotiation: A foundation for incomplete contracts. Review of Economic Studies, 66(1), 57–82. https://doi.org/10.1111/1467-937x.00078
Shapiro, C., & Willig, R. (1990). Economic rationales for the scope of privatization. In: E.N. Suleiman and J. Waterbury (eds.), The Political Economy of Public Sector Reform and Privatization. Westview Press.
Spengler, J. J. (1950). Vertical integration and antitrust policy. Journal of Political Economy, 58(4), 347–352. https://doi.org/10.1086/256964
Spier, K. E. (1992). Incomplete contracts and signalling. The RAND Journal of Economics, 23(3), 432. https://doi.org/10.2307/2555872
Tirole, J. (1988). Industrial organization. MIT Press.
Vickers, J. (1995). Competition and regulation in vertically related markets. The Review of Economic Studies, 62(1), 1–17. https://doi.org/10.2307/2297839
Vickers, J., & Yarrow, G. (1988). Privatization: An economic analysis. MIT Press.
Williamson, O. (1985). The economic institutions of capitalism. Free Press.
Willig, R. (1979). The theory of network access pricing. In: H. M. Trebing (ed.), Issues in Public Utility Regulation. Michigan State University Public Utilities Papers.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2001 Eduardo Saavedra
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
Article usage
- ViewsTimes this article's page was opened since the journal started recording statistics. One person can visit more than once.
- 127
- DownloadsTimes the full text of this article (usually the PDF) was opened or downloaded.
- 401
All time, as recorded by the journal.
Last 2 years: 62 views, 79 downloads.
3.16 downloads per view (journal average 1.66).Downloads of the full text for every abstract view of this article, compared with the whole journal.
Explore the journal's metrics
