Do Mergers Improve Efficiency? Evidence from Restructuring the U.S. Electric Power Sector

This paper analyses the performance impact of the merger wave which took place in the US electricity industry during the period 1994-2003. It does so by analyzing the impact on operating and total cost in electricity distribution. While there are past studies of efficiency and productivity effects, as well as of prices, profits, and other outcomes, this study differs in several ways. First, the database consists of many merging and non-merging firms, rather than only a few on which to base inferences. Second, all of these mergers arise in a single industry, greatly facilitating controlled comparison. Third, we have data on the several years of pre-merger and post-merger efficiency of the specific merging units, unlike virtually all past studies. And finally, we employ a powerful nonparametric technique - data envelopment analysis - to measure the efficiency of each operating unit. The results indicate that electricity mergers are not consistent with improved cost performance

The Direct Costs and Benefits of US Electric Utility Divestitures

This paper studies the impact of divestiture on the efficiency and costs of electric utilities. The empirical literature shows that there exist economies of scope for electric utilities and that divestiture decreases distribution efficiency but increases generation efficiency. This paper is to bring together these different results. Our analysis covers distribution, transmission, and power sourcing. Our data is an unbalanced panel of about 138 US electric utilities for the years 1994 to 2006 over which we observe 30 divestitures between 1997 and 2003. First, we regress firmlevel efficiencies for distribution and power sourcing on various divestiture indicators. Second, we compare the weighted cost between divested and non-divested firms and calculate a net present value for the entire sample of divestitures. Last, we regress net benefits from divestiture on the distribution side on the net benefit for power sourcing to see whether individual firms successfully off-set any costs of divestiture. We find that divestiture reduces distribution efficiency but increases power sourcing efficiency. Both effects depend on the amount of own nuclear generation output but not fossil-fuel or hydro output. The net present value for all divestitures in our sample is $11.3 billion. It seems that relatively lower costs of power outweigh losses in economies of scope as well as other restructuring costs. However, lower costs of power might be the result of favourable contracts put in place at the time of divestiture. Our study complements traditional studies of economies of scope and shows that divestitures might well be worth it

The New Industrial Organization and Small Business

The small business sector is an important part of the American economic landscape, in both absolute and relative terms. Despite its absolute growth, however, the sector accounts for a diminishing share of private sector activity. But its importance, and changes in importance, vary across industrial sectors of the economy. Drawing on the theoretical and empirical insights developed in recent books by John Sutton, we suggest that the presence or absence of endogenous strategic behaviors of the larger firms with respect to advertising, promotion, research and development, and other sunk cost expenditures may well play an important role in explaining the differing levels of small business importance, both cross-sectionally and over time. We conclude the paper with suggestions for research directions that could shed further light on these ideas

The Effect of Market Growth and Contraction on Industry Price-Cost Margins

Economic theory predicts that market growth or contraction may affect the role of industry concentration upon price-cost margins. Existing empirical work, however, has not specified the relationship completely or correctly. This article sets out a model consistent with theory and then tests several hypotheses on manufacturing industry data. It finds that the effect of concentration on industry pricing behavior declines when the overall market either grows or contracts sharply, and declines when the industry is highly capital-intensive. The effect of concentration, however, persists for the vast majority of cases.