Subadditivity Tests for Network Separation with an Application to U.S. Railroads

24 Pages Posted: 13 Apr 2004

See all articles by Marc Ivaldi

Marc Ivaldi

Toulouse School of Economics; Centre for Economic Policy Research (CEPR)

Gerard J. McCullough

University of Minnesota, Twin Cities - Department of Applied Economics

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Abstract

We describe a pair of subadditivity tests that can be used to evaluate the technological feasibility of separating a vertically integrated network monopoly into a common infrastructure component and competing operating components. We implement the tests with a Generalized McFadden cost function that is globally concave in input prices and permits the assignment of zero output values without losing its flexibility properties. The tests shed light on the respective roles of regulation and competition policy. We illustrate them with an analysis of U.S. freight railroads for the period 1978-2001 and find both vertical and horizontal economies of scope.

Keywords: Vertical integration, subadditivity, regulation, networks, railroads

JEL Classification: L14, L22, L51, L92

Suggested Citation

Ivaldi, Marc and McCullough, Gerard J., Subadditivity Tests for Network Separation with an Application to U.S. Railroads. Available at SSRN: https://ssrn.com/abstract=528542 or http://dx.doi.org/10.2139/ssrn.528542

Marc Ivaldi (Contact Author)

Toulouse School of Economics ( email )

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Gerard J. McCullough

University of Minnesota, Twin Cities - Department of Applied Economics ( email )

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