Measuring economies of vertical integration in network industries: An application to the water sector

This paper provides a framework that aims at distinguishing the technological economies of vertical integration from the vertical economies resulting from an inefficient input allocation due to upstream market imperfections. To illustrate our analysis, we use consistent panel data econometric methods to estimate cost functions on a sample of North-American water utilities. Contrary to what has been found for other network industries (electricity and gas for instance), we show that the global and technological economies of vertical integration are not significant except for the smallest utilities. (c) 2006 Elsevier B.V. All rights reserved.