Clementina Bruno
(University of Bergamo and HERMES)

Abstract - This work is aimed to present a review of the literature on economies of vertical and horizontal integration, focused on the public utilities industry. First of all, the definition of economies of scope and the different methods of evaluation are illustrated. Subsequently, the problem of integration connected with the implementation of unbundling (business separation) policies is presented for different categories of utilities (energy, telecommunications, water, multiutilities). The literature results quite rich concerning the electricity sector, where economies of horizontal and vertical integration seem to prevail. Paradoxically, it is the sector where the implementation of (vertical) separation policies aimed to foster competition has reached the most advanced level. Vertical unbundling is also broadly applied in the gas sector, where it seems to have been less costly in terms of loss of operational efficiency. In fact, the empirical evidence (here scarcer), does not show synergies coming from the joint management of upstream and downstream segments. About the water sector, the existing studies do not report unanimous results. However, the finding of no important synergies between water supply and sewerage seems to prevail. Instead, vertical economies seems to exist by managing jointly the different stages of the drinking water supply (water “production”, treatment and distribution), at least for some levels of output. The telecom industry has recently been involved in a wide debate concerning the cost and the opportunities of vertically separating the incumbent firms (in fixed telecom). It is also the sector where empirical findings on integration are more heterogeneous. The existing works mainly rely on quite old dataset, which constitutes a relevant limit in an industry whose technology evolves rapidly. Finally, the multi-utilities sector is analyzed. Important economies of scope emerge from the joint production of several services (energy, gas and water supply). Such economies seem to be correlated to the firm dimension, and larger for small level of output, while they decrease or turn into diseconomies for large production levels. Finally, the problem of the quality of service is treated, by examining the indicators used in these different sectors, and it is linked to the problem of integration. At the present moment, empirical studies on economies of integration rarely involve quality measures, while the importance of such an element in terms of consumer welfare suggests that it can be an interesting point to be considered in future research.