Working Paper: CEPR ID: DP4392
Authors: Marc Ivaldi; Gerard McCullough
Abstract: We describe a pair of subadditivity tests that can be used to evaluate the technological feasibility of separating a vertically integrated network monopoly into a common infrastructure component and competing operating components. We implement the tests with a Generalized McFadden cost function that is globally concave in input prices and permits the assignment of zero output values without losing its flexibility properties. The tests shed light on the respective roles of regulation and competition policy. We illustrate them with an analysis of US freight railroads for the period 1978-2001 and find both vertical and horizontal economies of scope.
Keywords: networks; railroads; regulation; subadditivity; vertical integration
JEL Codes: L14; L22; L51; L92
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Network Separation (D85) | Operational Efficiency (D24) |
| Operational Separation Test (C44) | Technical Efficiency Loss (D61) |
| Cost Function Subadditivity (D24) | Need for Government Oversight (G38) |