Liberalisation in network industries

In this chapter, we aim to establish whether liberalization and accompanying regulatory arrangements have delivered the expected efficiency gains. In section I, we discuss the theoretical issues and demonstrate that ‘marketable’ yet simplistic arguments in favour of liberalization tend to ignore a complex set of issues such as imperfect competition, imperfect information, and second-best consequences that are highly likely to limit or prevent the achievement of efficiency and welfare gains. In section II, we review the empirical findings. We find that the partial evidence in support of the liberalization agenda in the telecommunications and energy sectors is overshadowed by the evidence suggesting that liberalization and regulation have usually failed to deliver the expected efficiency gains. In Section III, we narrow our focus to investment and innovation in the telecommunications and electricity sectors. The evidence here suggests that liberalization may be conducive to incremental innovation/investment in sectors where maintaining market shares and/or mark-ups is a significant concern. However, liberalization has either negative or ambiguous effects on investment in radical breakthroughs, and it does not necessarily lead to optimal investment when compared with public monopolies. Finally, in the conclusion, we summarise the main findings and highlight the implications for the European integration process.