July 9, 2002

Welfare effects of vertical integration in energy distribution

This paper analyses the welfare effects of vertical integration of networks and trade in energy markets.

Vertical integration reduces the effect of double marginalisation, thus increasing welfare. On the other hand, vertical integration hinders equal competition, rendering the vertically integrated supplier a competitive advantage.

We find that the net effect of vertical integration is beneficial to welfare if firms are symmetric, but the effect is ambiguous in the probably more relevant situation where the non-network firm has a cost advantage.


Mark Lijesen