Comparing the costs and benefits of diversification by regulated firms |
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Authors: | Timothy J. Brennan Karen Palmer |
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Affiliation: | (1) University of Maryland, 21228 Baltimore, MD;(2) Resources for the Future, 20036 Washington, DC |
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Abstract: | Previous work on the diversification of regulated firms has focused exclusively on either the costs of cross-subsidy or on the welfare gains resulting from economies of scope. Using theory and numerical simulations, we identify conditions under which gains from economies of scope and increased competition tend to outweigh the costs of cross-subsidization. We use a perfect competition model of the unregulated market to examine tradeoffs under economies of scope. Effects of increased competition are assessed using Cournot models with linear and constant elasticity demands. Diversification tradeoffs depend upon magnitudes of variables that regulators should be able to estimate or otherwise judge. |
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