The Measurement of Vertical Economies and the Efficient Structure of the Electric Utility Industry.

In this article, the concept of multiproduct cost economies is modified to the case of production at vertically related stages to derive an explicit and general measure of economies of vertical integration. The utility of this measure is then demonstrated by estimating the vertical cost structure of the electric utility industry and by carrying out the calculations necessary to determine the magnitude of vertical economies in this industry. The results provide empirical evidence of the existence of significant economies of vertical integration between the generation and transmission/distribution stages of electricity supply. Copyright 1991 by Blackwell Publishing Ltd.