Introducing Product-Market Competition in the Water Industry
Traditionally, network industries such as electricity, telecommunications, railways or water supply are regarded as natural monopolies. The duplication of the networks (railroad system, water pipes etc.) would not be efficient and therefore undesirable. Hence, there is no reason to have several firms engaged in the market, because total output could be produced cheaper within a single firm. For a long time, the existence of natural monopolies and quality concerns among other issues served to justify the absence of direct competition. For that reason in many European countries network services were provided by public enterprises or strongly regulated private firms. However, in the course of privatisation and liberalisation, governments and regulators tried to expand the role of competition. Two main possibilities exist in order to implement effective rivalry into network industries: franchise bidding, called competition for the market, and product-market competition, known as competition in the market. In the piped water industry, there is far more experience with the former approach. However, due to the capital intensity of water supply competition for the market has severe drawbacks. Hence, the introduction of product-market competition may be a valuable alternative. However, both practical experience and theoretical research about the effects and the efficiency of product-market competition are still very limited in the piped water industry. This Chapter analyses product-market competition within a simple model of interconnection where competition is introduced between vertically integrated neighbouring water suppliers.2
KeywordsMarginal Cost Water Sector Investment Incentive Access Price Access Charge
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