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...integration.
The issue vertical integration and vertical separation harkens back to debates over the firm's boundaries. Better understanding the firm's boundaries, and thus the choices between firm and market, is one of the central themes in the economic analysis of the firm.
Ever since Coase's seminal paper in 1937, there has been growing body of theoretical literature that seeks to understand, on the one hand, the incentives for firms to integrate (or disintegrate) vertically and, on the other, the impact that vertical integration has on the market power of firms that operate on downstream and upstream markets, and on consumer welfare. At the same time, a considerable body of empirical literature has developed, making it possible to confirm or not the results of theoretical works by type of economic activity and by industrial sector (1).
In regulated network industries, vertical integration/separation has become a burning issue. The question is being addressed by incumbent carriers in particular which are having to compete with new entrants, while also controlling infrastructure networks which, depending on the case, generally derive from a natural monopoly. As a result, in energy industries (gas and electricity), transportation industries (air, rail) and telecommunications industries, regulators view vertical separation as a remedy that enables simpler access regulation and ensures nondiscrimination and the emergence of fair competition. Vertical separation can take several forms, and can correspond to different degrees of disintegration depending on the characteristics of the industry and the companies involved. It may take the form of accounting separation, functional separation, structural separation or separate ownership.
On the whole, accounting separation helps streamline regulator oversight of discriminatory pricing by the integrated operator. As a result, by implementing separate accounting for operations related to essential infrastructure and service-related operations, the integrated operator makes its pricing policies for accessing infrastructure more transparent. This obligation thus limits the dangers of an integrated operator manipulating its access tariffs and discriminating against its retail market rivals. In network industries, however, where infrastructure encompasses highly complex technical forms and characteristics, the possibilities of discrimination are not confined to strategic manipulation of pricing variables. In other words, discrimination can also involve non-price variables, in which case accounting separation alone will prove an inefficient remedy. And it is in fact the possibility of non-price discrimination that generally justifies the transition to the functional separation of the integrated operator's activities. This involves the separation of the entity in charge of marketing access to infrastructure,...
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