Abstract
In this article, we discuss the use by competition and regulatory authorities of vertical separation as a tool to promote competition in industries where a vertically integrated firm owns a monopoly or quasi-monopoly input (e.g. the ‘local loop’ in telecoms, or the transmission grid in electricity). There are a range of vertical separation options, from the least intrusive (‘accounting separation’), through to the most intrusive (full ownership separation). The case for or against a vertical separation remedy in any particular instance depends on an assessment of a trade-off between the benefits of increased competition, and the economic costs. These costs can include loss of coordination of activities between the separated entities, ‘hold-up problems’, and ‘double marginalisation’. To illustrate the costs and benefits, we describe the application of accounting and legal separation in the water sector in Great Britain, functional separation for the telecommunications sector in the UK, and ownership separation of an electricity network in Germany.
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