Efficient industry configurations in downstream gas markets. An empirical assessment

This paper examines the production technology of the downstream gas industry in order to provide some useful insights into its efficient structure by looking at the optimal size of firms and the productive efficiency reasons for and against their vertical integration. The analysis is based on a restricted cost function model estimated using firm level data for Argentina and Great Britain. The findings provide evidence for the presence of vertical diseconomies between stages. Results indicate that a single transmitter is able to produce the industry's output at lower costs for large market sizes and that several regional firms are able to operate without sacrificing scale economies if gas distribution is integrated with supply. The findings also indicate that a gas retailer experiences constant returns to scale when it supplies a large customer base. Liberalisation could thus result in oligopolistic industry configurations.