Product-Market Competition in the Water Industry: Voluntary Non-discriminatory Pricing

Authors: Foellmi, Reto¹; Meister, Urs²

Source: Journal of Industry, Competition and Trade, Volume 5, Number 2, June 2005 , pp. 115-135(21)

Publisher: Springer

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Abstract:

Since franchise bidding in the piped water industry is problematic due to extensive investment requirements, product-market competition or common carriage is a valuable alternative for the introduction of competition. This paper analyses product-market competition by considering a simple model of interconnection where competition is introduced between vertically integrated neighbouring water suppliers. The model contains water markets specificities such as local and decentralised networks and related difficulties of regulating access charges. Even without any regulation, we show that: (i) an inefficient incumbent will give up its monopoly position and lower the access price far enough so that the low-cost competitor can enter his home market; (ii) efficiency of production will rise due to liberalisation; and (iii) in contrary to prejudicial claims, investment incentives are not destroyed by the introduction of competition for the market. Investments of low-cost firms may even increase.

Keywords: product-market competition; water industry; nondiscriminatory pricing

Document Type: Research article

DOI: http://dx.doi.org/10.1007/s10842-005-3722-0

Affiliations: 1: Institute for Empirical Research in Economics, University of Zurich, Blümlisalpstrasse 10, CH-8006, Zürich, Switzerland, Email: rfoellmi@iew.unizh.ch 2: Institute for Strategy and Business Administration, University of Zurich, Plattenstrasse 14, CH-8032, Zürich, Switzerland, Email: urs.meister@isu.unizh.ch

Publication date: 2005-06-01