Optimal scale in the Italian gas distribution industry using data envelopment analysis |
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Authors: | Fabrizio Erbetta Luca Rappuoli |
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Institution: | 1. University of Eastern Piedmont, Faculty of Economics, 28100 Novara, Italy;2. HERMES, Center for Research on Regulated Services, 10024 Moncalieri, Torino, Italy |
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Abstract: | The Italian gas distribution industry presents a high degree of fragmentation. However, the tendency between 1970 and 1998 was a concentration process. Available evidence supports the thesis that local distributors have undertaken a process of scale enlargement. This raises the question of characteristics of returns to scale for such operators as well as the optimal scale at which they should operate. Returns to scale are analysed by data envelopment analysis (DEA) methodology. The results show that the output space in which DMUs attain a high level of scale efficiency is widespread, thus indicating an unexpected return to scale characterisation. Technology shows increasing returns only for the smallest units, but such an effect is rapidly exhausted in favour of a regime of constant returns to scale. The main managerial conclusion is that an improvement of productivity may be reached via an intensification of the merging process involving local distributors operating at a small scale. Moreover, the concentration process appears as an “attainable” objective since the critical dimension, which permits the exploitation of positive returns to scale, is quite small. |
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Keywords: | L11 L23 L95 |
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