Reorganization of public utilities is on the currentpolitical agenda in many European countries. However,in many cases the most fundamental question in termsof public policy towards these industries is nottested; does the underlying cost structure indicate anatural monopoly or not? Evans and Heckman's analysisof the US Bell System is one of the few exceptions,but their method has a serious problem as theirestimated cost function is not well behaved (negativemarginal costs). To solve this problem we propose touse the consistency region (i.e., the region where theestimated cost function is well behaved) as the testregion. We apply our testing procedure to Norwegianelectricity distribution and find that localelectricity distribution is characterised as a naturalmonopoly. Policy implications of the result isalso discussed.
Review of Industrial Organization – Springer Journals
Published: Oct 6, 2004
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