Product-Market Competition in the Water Industry: Voluntarily Nondiscriminatory Pricing

Abstract

This paper presents an attempt to create competition in the water market by means of direct competition. We argue that the usual liberalisation device, competition for the market by franchise bidding, is problematic due to particular features in the water industry. Our approach proposes the implementation of product market competition, i.e. competition in the market. In such a situation several water utilities using a single set of pipes compete for customers in the same area. nUsing a two way access model with vertically integrated water suppliers, we show that: (i) Even without any regulation, an inefficient incumbent will give up its monopoly position and lower the access price far enough so that the low-cost competitor can enter his home market. (ii) Efficiency of production will rise due to liberalization. (iii) In contrary to prejudicial claims, investment incentives are not destroyed by the introduction of competition. Investments of low-cost firms may even increase.