Horizontal integration under yardstick competition

Horizontal integration through mergers and cross-ownership is ubiquitous; industries regulated by yardstick competition are no exception in this regard. However, even though yardstick competition is applied to sectors of vital economic importance, such as energy and water networks, the welfare effects of horizontal integration in these settings have largely escaped scientific scrutiny. The dissertation therefore studies the welfare implications of horizontal integration under yardstick competition and identifies potential trade-offs. Specifically, whereas mergers and cross-ownership may bring about efficiency gains, there is a possibility that horizontal integration simultaneously decreases the effectiveness of regulation, benefiting certain firms at the expense of consumers and competitors. Key conditions for such strategic effects to occur and to dominate efficiency effects are derived in a principal-agent model. The thesis also demonstrates that the issue is not merely of academic interest, but has affected the practical application of yardstick competition in the electricity distribution industries of both Belgium and Norway.

Chapter 1 analyses how horizontal mergers, joint ventures and regulatory decentralisation complicate the application of yardstick competition in Belgian electricity distribution. Chapter 2 develops a theoretical model of mergers under yardstick competition - formalising the welfare trade-offs at the heart of this dissertation. Chapter 3 leverages Data Envelopment Analysis to quantify both efficiency and strategic effects of horizontal restructuring in Norwegian electricity distribution and points to a recent merger that appears to have been driven by strategic motivations. Chapter 4 uses several econometric identification strategies - dynamic regression, matching on observables and instrumental variables - to establish that between 2007 and 2015, cross-ownership increased firm performance in Norwegian electricity distribution, which suggests that the net welfare effects were positive in this application.