The potential economic gains from full
market opening in network industries
A study by Copenhagen Economics
for the UK Department of Trade and Industry
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The potential economic gains from full market opening in network industries
January 2007
The potential economic gains from full market opening in network industries
Market opening in network industries has already produced significant economic gains in the
EU15 countries. During the 1990s, market opening succeeded in increasing productivity and
reducing prices in the network industries. As network industries provide crucial inputs for
production in all other sectors of the economy, market opening led to significant spill-over
effects to the rest of the economy contributing significantly to the overall economic gains in
terms of welfare, consumption and employment. This was the main conclusion of our 2005study on market opening in network industries which we carried out for the European
Commission.1
Nevertheless, we reason that significant effects may be in store from pursuing further market
opening in network industries. We find that welfare and value added on EU15 level may
increase by 1.3-1.7 percent and 1.0-1.6 percent respectively in response to full market
opening. The rise in economic activity is expected to increase the number of new jobs in the
EU15 by 140-360 000. Given that these effects are estimated for the EU15, we would expect
greater benefits for the EU25 (but see Footnote 3). We interpret the results to be of a short
term nature as they do not include dynamic effects from market opening such as new product
or organisational innovations leading to higher productivity in the longer run. These long run
effects are also likely to increase the impact beyond the figures quoted in this paper.
The potential gains are primarily driven by market opening in telecommunications, electricity,
and postal services for two reasons. First, these three industries are economically important,
since they account for more than ¾ of all output from the network industries covered in this
study. Hence, changes in their prices and productivity levels have a particular large effect on
the rest of the economy. Second, the expected price and productivity changes brought about
by full market opening are larger in these industries than in most of the other network
industries; this is particularly the case for the telecommunications and postal services.
The potential gains amount to between 50 and 90 percent of the economic gains accrued from
the market opening that took place during the 1990s. The results of this study are directly
comparable to the results from the 2005-study as we have not only applied the exact same
methodology in the current study, but we have also covered the exact same six industries2
(telecommunications, electricity, gas, postal services, rail transport, and air transport) and the
same (EU15) countries.
Effects of full market opening
We find the potential gain of going from the current 2006 level of market opening to full market
opening in the network industries to result in a 1.3-1.7 percent increase in welfare in the EU15,
See Copenhagen Economics’ 2005-study Market Opening in Network Industries for the European Commission on
www.copenhageneconomics.com.
2 In the current study we do not cover urban transport which we did in the 2005-study. However, this difference has
no impact on the size of economy-wide gains, as the industry is economically insignificant.
1
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The potential economic gains from full market opening in network industries
cf. Table 1.3 This corresponds to a permanent ‘step change’ gain of approximately €75-€95
billion in monetary terms. Furthermore, the effect on the labour market corresponds to a net
addition of approximately 140 000-360 000 new jobs across the EU15, both inside and outside
the network industries.
We have calculated the spread based on two scenarios. The first one we call ‘business as
usual’, in which we assume that network industry prices and productivity react to full market
opening in the same proportional way they reacted to the historical market opening that took
place during the 1990s, and which we covered in the 2005-study. This scenario provides the
upper bound in the spread. The second scenario we call the ‘pessimistic’ scenario as it
assumes that full market opening has less than proportional effects on primarily prices
compared to the effects we observed during the 1990s. This scenario provides the lower bound
in the spread.
Table 1: Expected economy-wide effects of full market opening for the EU15
Effects accruing
from the current state of market opening to full market opening
(short term effects)
Business as usual scenario
% change
Absolute effect
Pessimistic scenario
% change
Absolute effect
Welfare
1.7
€95 bn
1.3
€ 75 bn
Value added
1.6
€130 bn
1.0
€ 80 bn
Employment
0.2
360 000 jobs
0.1
140 000 jobs
Note: The table shows the economy-wide effects that emerge when the economy has adjusted fully to the effects of
full market opening. Welfare is measured as comprehensive consumption. Absolute effects are calculated by
multiplying the percentage gains by the respective 2005-values for EU15. For welfare we use total private
consumption (See Methodology section).
Source: CETM model - Copenhagen Economics, Eurostat.
The ‘pessimistic’ scenario reflects a situation where prices decrease less or even increase in
the light of full market opening for some reason. For example, supplier concentration could
increase, leading to higher mark-ups (compared to a situation with less market opening).
Higher mark-ups have an asymmetric effect on overall value added compared to welfare as the
former decreases more than the latter. This is why we find a larger spread between value
added and welfare in the pessimistic scenario compared to the business as usual scenario as
depicted in Table 1. Welfare drops by 0.4 percentage-points when going from the business as
usual to the pessimistic scenario. Value added drops by more, 0.6 percentage-points, when
going from the business as usual to the pessimistic scenario.
The difference between 0.4 and 0.6 is due to the fact that the reduced demand for labour in the
network industries caused by higher mark-ups unambiguously reduces value added, whereas it
implies two effects for welfare, each pulling in a different direction: As households derive their
welfare from consuming goods/services and leisure, lower value added reduces household
income thereby reducing their consumption of goods and services and thus welfare; but lower
demand for labour also increases household leisure time thereby increasing welfare.
3
The model incorporates the 10 new member states together with the rest of the world. Including them individually
will not markedly impact the EU15 member states, and market opening in the EU15 will, likewise, not markedly
impact the new member states. Only market opening within the new member states will have a significant
economic impact. However, since market opening has not been analysed in the new member states, no market
opening milestones (MOM) or market opening index (MOI) exist. Consequently, it is not feasible to calculate the
economy wide effects of market opening in the new member states.
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The potential economic gains from full market opening in network industries
Sectoral effects
Market opening leads to higher productivity and lower mark-ups in network industries. The
combination of lower mark-ups leading to lower prices and higher productivity leading to larger
production and lower prices, results in a modest increase in the value of output (since value is
equal to price times production) in the network industries as shown in Table 2 and Table 3.
Table 2: Aggregate effects of market opening on the provision of network services – business as
usual scenario
Telecom
munications
Electricity
Rail
transport
Air transport
Gas
Postal
services
Percent
Prices
-11
-13
-17
-2
1
-21
4
3
3
4
3
5
Output
Cross border
29
31
55
6
5
55
trade
Note: The table shows average EU15 changes in prices and market size in network industries as a result of market
opening. Output is measured as the total value of output.
Source: CETM model – Copenhagen Economics.
Table 3: Aggregate effects of market opening on the provision of network services – pessimistic
scenario
Telecom
munications
Electricity
Rail
transport
Air transport
Gas
Postal
services
Percent
Prices
-10
-6
-11
-2
1
-18
Output
3
2
2
3
1
4
Cross border
25
15
21
6
2
48
trade
Note: The table shows average EU15 changes in prices and market size in network industries as a result of market
opening. Output is measured as the total value of output.
Source: CETM model – Copenhagen Economics.
The tables show that prices fall in most industries, as we expect. However, for gas the prices
remain fairly unchanged in the light of market opening (they even seem to rise a bit). This is
primarily due to the estimated relationship between market opening and gas prices not
producing strong evidence of gas prices falling in light of market opening. However, as is the
case for all the network industries, the impact on prices of major infrastructure investments
such as new interconnectors or pipelines is not explicitly modelled (only indirectly through
general market opening to the extent it leads to new infrastructure investments). In a case
where such infrastructure is built, prices may be affected markedly, at least in the country in
question.
On the other hand, the results are not sensitive to underlying developments in other factors.
The model simulations based on the full market opening scenario, reflects changes due to
market opening only; other factors do not impact these results.
The large increase in cross border trade for postal services does not refer to an increase in
cross border postal traffic, but means that postal firms will increasingly operate in countries
other than their home base. Even though the estimates on changes in cross border trade seem
high in some industries, bear in mind that they are measured in percentage, and that the
network industries are only to a very limited extent engaged in cross border trade. For that
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The potential economic gains from full market opening in network industries
reason as well, we do not know much about what will happen to cross border trade in a market
characterised by full market opening. Consequently, the cross border estimates should be
interpreted carefully.
The change in cross border trade is primarily caused by higher productivity which increases
competitiveness making it profitable to export services. If the industry in another country
experiences a similar rise in productivity, the change in cross border trade will be neutralized.
The impacts in telecommunication, electricity, and postal services are the main drivers of the
economy-wide gains. These three industries dominate the picture because 1) they represent a
relatively large share of the total economy compared to the remaining three industries; and 2)
they experience medium to large drops in price along with rises in productivity levels
stimulating demand from other sectors in the economy and reducing their input prices, leading
to further productivity gains and price declines in these sectors, cf. Table 4. This accelerator
mechanism is an important driver of economy-wide gains.
Table 4: Industry contribution to economy-wide welfare gain
Size of price and productivity
effect in full market opening
Telecommunication
Large
Large
Electricity
Large
Large
Postal services
Medium
Large
Rail (freight + pas.)
Small
Large
Air
Medium
Medium
Gas
Small
Small
Note: Size of industry refers to the share of the total EU15 economy. Large reflects a share larger than 1%, medium
0.5-1% and small is given by a share below 0.5%., cf. Appendix 1. ‘Effects’ refer to price impacts from the model
simulation of full market opening. Small effects are defined as price drops of less than 1%. Medium shocks are
defined as price drops between 1-10%. Large shocks are defined as price drops of more than 10%, cf. Table 2. The
price drops are from the business as usual-scenario, but the order of importance is no different in the pessimistic
scenario.
Source: CETM model – Copenhagen Economics.
Industry
Size of industry
Table 4 shows that postal services experience a large price and productivity effect which,
combined with its medium share of network industry output, makes it the third most important
industry in explaining the economy-wide results (telecommunication and electricity are the two
most important ones). The primary reason for the large effect in postal services is that it is
currently lagging behind in market opening. Consequently, full market opening implies a
significant increase in market opening leading to a similar significant effect on price and
productivity.
The spill-over effects across non-network industries tend to be slightly stronger for the service
sectors as a result of their more intensive use of network services. For example, business
services experience increases in value added of 2 percent while the metal industry
experiences a rise of 1 percent cf. Table 5.
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The potential economic gains from full market opening in network industries
Table 5: Spill-over effects on key non-network sectors (EU15 averages)
Business
services
Distributive
trade
Metal and
electrotechnical
industries
Other
services
Petroleum
and
chemical
industries
Percent
Value added
2
2
1
1
2
Employment
1
0
-0
-0
1
Note: The table shows average EU15 changes in value added and employment in select non-network industries as
a result of market opening. The changes are based on the ‘business as usual’-scenario, but do not differ
qualitatively from the pessimistic scenario.
Source: CETM model – Copenhagen Economics.
Full market opening and the Market Opening Index
The implied change in the market opening index achieved from implementing full market
opening is the difference between one and the value in 2006 as illustrated in Figure 1. The
figure also depicts the value of the market opening index in 2003, the last year for which
market opening is updated in the 2005-study (see Methodology section, below).
Figure 1: Market Opening Index in six network industries, EU15
1.0
0.9
Market Opening Index
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
Air
Electricity
Gas
Market Opening 2003
Post
Railfre
Market Opening 2006
Railpas
Telecom
Full Market Opening
Note: The figure shows the market opening index as a weighted average over the EU15 Member States using
shares of total output. For example Italy generates ten percent of the total electricity in EU15 and therefore, the
Italian Market Opening Index for electricity has a ten percent weight in the overall EU15-index for electricity.
Source: Copenhagen Economics.
Comparing effects of full market opening with historical market opening
When comparing the economy wide results with those from the 2005-study covering market
opening during the 1990s, we find that full market opening promises substantial gains. We find
that gains in welfare and value added from full market opening constitutes between 50 and 88
percent of the welfare and value added-gains obtained from market opening during the 1990s,
cf. Table 6.
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The potential economic gains from full market opening in network industries
Table 6: Comparing the economy-wide effects of the current and the 2005-study, EU15
Welfare
Value added
Percent
Share of gains from full
market opening compared to
gains from market opening
between 1990 and 2000
Business as usual
88
80
Pessimistic
68
50
Current study of full market
opening
Business as usual
1.7
1.6
Pessimistic
1.3
1.0
2005-study on market opening
1.9
2.0
from 1990-2000
Note: The table shows and compares the short run economy-wide effects in the current study with those of the
2005-study. For example, in the current study we find welfare gains of 1.3 and 1.7 percent for the pessimistic and
business as usual scenario, respectively; in the 2005-study we found welfare gains of 1.9 percent. The share of the
current to the previous gains constitute 68% (=1.3/1.9) and 88%=(1.7/1.9). Welfare is measured as comprehensive
consumption.
Source: CETM model - Copenhagen Economics and Copenhagen Economics’ 2005-study, see footnote 1.
Long run effects
The results reported so far consider the economy-wide effects of market opening on prices and
productivity in the short run in a way that allows for comparability with the short run results from
the 2005-study. However, as the gains are not expected to fully materialize in the short run, we
expect long run gains to be larger; both due to slow firm adjustment in price and productivity
following full market opening, and due to new innovations and services brought about by
market opening.
The estimates of the long-run effects on prices and productivity are unfortunately significantly
less reliable than the short-run estimates. The simulations of the economy-wide effects in the
long-run necessarily reflect the uncertainty embedded in the econometric estimations.
That being said, we find long run effects of full market opening of up to 3.3 percent in terms of
welfare. However, in the pessimistic scenario the impact is reduced to 1.7 percent, cf. Table 7.
This may be compared to the 3.7 percent welfare gains found in the 2005-study.
Table 7: Expected economy-wide effects of full market opening for the EU15
Long run effects
Current study of full
market opening
2005-study on market
opening from 1990-2000
Welfare
Value added
Business as usual: 3.3 %
Pessimistic: 1.7 %
Business as usual: 3.4 %
Pessimistic: 1.1 %
3.7 %
4.1 %
Note: The table shows the long run economy-wide effects in the current study and from the 2005-study. Welfare is
measured as comprehensive consumption.
Source: CETM model - Copenhagen Economics.
We emphasize that the long run findings contain a large degree of uncertainty, and should
therefore be interpreted with great care. They do indicate, however, that impacts are higher in
the longer run than in the short run.
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The potential economic gains from full market opening in network industries
Two assumptions
We make two technical assumptions that are important for our findings of the potential gain of
full market opening: an assumption of the type of relationship between market opening and
price and productivity effects, and an assumption regarding the timing of full market opening.
The relationship between market opening and industry performance
We assume both a linear and a non-linear relationship between market opening and price and
productivity effects in the network industries. Even though the linear relationship proved a good
approximation in our 2005-study covering the more regulated (less opened) environment in the
1990s, it may not be a good approximation of the current reality facing full market opening.
One argument against the assumption of a linear relationship is that the first small advances in
market opening result in much bigger price and productivity gains compared to further (full)
market opening. This implies that market opening initiatives are substitutes in the sense that
marginal market opening initiatives deliver smaller gains than the previous initiatives. An
extreme situation is one where private natural monopolies arise in the light of full market
opening leading to higher mark-ups, compared to a situation with less market opening. This
would imply that the presence of certain regulatory measures deliver larger economic gains
than do full market opening.
Another reason for why future full market opening may deliver smaller gains than experienced
during the 1990s is the introduction of an emissions-trading scheme (ETS) in 2005 in the EU4.
As the purpose of the ETS is to set a cap on emissions by handing out a certain number of
permission to pollute, this may limit the potential productivity gains in energy intensive
industries brought about by market opening. However, recent evidence indicates that Member
States so far have handed out more permits than needed. This is also indicated by the very low
prices on emission permits5. Consequently, the ETS does not currently seem to dampen much
the benefits accruing from market opening6.
There is also another, but contradictory, argument against the linear assumption which is that
full market opening is necessary to truly reap the benefits in terms of lower prices and higher
productivity as the existence of even small barriers are enough to diminish or offset the positive
impacts of previous market opening initiatives. This suggests that market opening initiatives
tend to be more like complements implying that marginal initiatives deliver greater price and
productivity gains compared to the previous initiatives.
If indeed market opening initiatives are actually substitutes, the assumption of linearity implies
overestimating the responses in prices and productivity of going to full market opening. If on
the other hand market opening initiatives are actually complements, the linearity assumption
implies underestimating the reaction in price and productivity response. These situations are
illustrated in Figure 2.
Member States have set caps on overall greenhouse gas emissions, and then handed companies a corresponding
number of permits to pollute. Firms that want to exceed their allocations must buy spare permits from cleaner
rivals, or else pay for projects to offset their excess emissions in poor countries. The system known as the
emissions-trading scheme is designed to help European countries to meet their commitment to cut emissions
under the Kyoto Protocol as cheaply as possible.
5 See The Economist, December 2nd 2006.
6 We do not explicitly model the impact of an ETS.
4
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The potential economic gains from full market opening in network industries
Figure 2: Illustration of price reaction given different assumptions
Price
Estimation points from 2005-study
are located in the lower range of
market opening
Initiatives are substitutes
(pessimistic)
Linear
(Business as usual)
Initiatives are complements
(optimistic)
No market
opening
Full market
opening
Note: The figure illustrates how different assumptions about price reactions to market opening will result in different
price changes to full market opening. Neither the dots nor the curves are rooted in actual numbers, they merely
serve to illustrate.
Source: Copenhagen Economics.
The spread in results on welfare and value added that we report above, is caused by the
assumption of a linear relationship or ‘business as usual’, and the assumption of an upwards
curving relationship or ‘pessimistic’. The upper bound on welfare of 1.7 is based on the
business as usual assumption whereas the lower bound (welfare gains of 1.3) is based on the
pessimistic assumption.
Timing of full market opening
We assume that full market opening is phased in over three years in order to ensure
comparability with the 2005-study. It is important to emphasize that the assumption on the
appropriate number of years required to phase in full market opening is a purely technical one
that we make in order to ensure comparability with the short run results from the 2005-study. It
is not an attempt to predict a realistic country commitment to full market opening, and it must
not be interpreted to imply that different lengths of phasing-in produce different economic
results.
Comparability implies that we should ascertain that the economic environment in the base year
of the old and the new simulations is as similar as possible. In the base year for the 2005study, European network industries experienced a pace of market opening which, from the
current point of market opening, would guarantee full phase-in within three years.
In technical terms, the 2005-study uses short run industry price and productivity effects from
market opening as input to the simulation model (the Copenhagen Economics Trade Model);
hence, we must also use short run effects. Since we calculate short run effects, we need to set
up assumptions of how market opening is phased in.
In order to find the number of years required to phase in full market opening, we calculate the
pace of market opening around the base year of the old simulations and use this pace for
phasing in. This ensures comparability with the 2005-study.
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The potential economic gains from full market opening in network industries
The 2005-study focused on the price and productivity effects in the year 20017 as a result of
market opening in the 1990-2000-period, where – in terms of the Market Opening Index (MOI)
– market opening increased by app. 0.45 or app. 0.045 per year. However, most market
opening happened in the 1998-2000-period where market opening increased by 0.25 equal to
a yearly growth of 0.08, c.f. Figure 3. Assuming the same yearly growth for full market opening,
the value corresponding to 0.25 can be achieved within three years.
Figure 3: Number of years for phasing in full market opening
Market Opening Index (MOI)
1.0
Full market opening
equals a rise of
0.25 in MOI
0.8
0.6
Rise in MOI of
around 0.25 from
1998-2000
0.4
Year 3
Year 2
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0.0
Year 1
0.2
Note: The figure shows that market opening increased by the same size in the late 1990s as implied by full market
opening from the current level. The MOI is calculated as a weighted average over industries and countries. The
weights are output shares of total output by country and EU15.
Source: Copenhagen Economics
We have made alternative calculations showing that a period of three years for phasing in full
market opening is indeed the correct period to use in order ensure comparability with the 2005results.
More specifically, we have calculated the long run effect of full market opening on industry
prices and productivity (using the business as usual assumption as this is used in the 2005study), implemented and simulated them in the CGE model and compared the economy-wide
impacts with the long run impacts from the 2005-study. We find long run economy-wide gains
of full market opening corresponding to 83 percent (value added) and 89 percent (welfare) of
the gains found in the 2005-study8.
As the period used for phasing in full market opening is irrelevant in the long run, this ratio
suggests that the proper period for phasing-in full market opening is one where the short run
results correspond to 83 and 89 percent of the short run results in the 2005-study for value
added and welfare, respectively.
In the section above, we find that phasing in full market opening over three years produce short
run results equivalent to 80 and 88 percent of the results in the 2005-study, for value added
and welfare respectively (see Table 6). As these percentage shares are almost identical to the
The base year of the simulation is 2001 and not 2000 since market opening did not impact prices and productivity
in the year of legal implementation, but the year immediately afterwards. 2001 is also the year of calibration for the
Copenhagen Economics Trade Model.
8 These percentages can be calculated from Table 7 (3.4/4.1=83% and 3.3/3.7=89%).
7
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The potential economic gains from full market opening in network industries
83 and 89 percent percentage shares from the long run impacts, this signals that the chosen
three-years phase-in of full market opening produce short run results that may be compared to
the short run results from the 2005-study.
Methodology
In order to come up with an estimate of the economy-wide impacts from full market opening,
we go through three stages. Below we briefly describe the content of the three stages,
however, the more interested reader is encouraged to read through the detailed description in
the 2005-study9.
In the first stage, we measure – in quantitative terms – the level of market opening in 2006 for
each of the six network industries in each of the EU15 Member States via the Market Opening
Index (MOI). The index measures the level of market opening on a scale between zero and
unity. The index is constructed such that full market opening, by definition, corresponds to unity
value.
For example, the average market opening index for the EU15 Member States in postal
services takes on the value 0.56 in 2006 implying that the market for postal services is far from
fully opened. In contrast, the market opening index for air transport is 0.84, implying that the
industry is 16 percent away from attaining full market opening (see Figure 1).
In the second stage, we calculate the expected effect on industry productivity and prices from
introducing full market opening. In order to do this, we make use of industry specific
parameters estimated in our 2005-study. The parameters measure the link between price and
productivity, and market opening; and based on these parameters, we calculate the industry
specific price and productivity effects implied by the business as usual scenario and the
pessimistic scenario.
In the third stage, we use the price and productivity changes from the two scenarios as input to
the Copenhagen Economics Trade model in order to simulate the economy-wide impact of full
market opening. The Copenhagen Economics Trade Model is a global, multi-regional,
computable general equilibrium (CGE) model capturing all linkages between the different
sectors of the economy, specifically designed for the analysis of market opening in network
industries. The linkages are important, because market opening will reduce the price of
network services creating significant spill-over effects in other sectors.
The model produces a welfare measure. Welfare is defined as comprehensive consumption,
which weighs together households’ value of consumption of goods and services as well as
their value of leisure time. The relationship between the value of leisure and consumption is
expressed in the households’ utility function, which is approximated by a CES (Constant
Elasticity of Substitution)-function, implying that households choose between consumption of
goods and services, A, and leisure time (equivalent to not working), T, based on the relative
price between the two, and the substitution-elasticity:
U =( Aλ + T λ )1/ λ
where the elasticity of substitution, σu=1/(1-λ), is calibrated for each country to represent an
uncompensated labour supply elasticity, ε, equal to 0.2. Aggregate consumption, A, is a CobbDouglas aggregate of consumption of goods and services. CGE models in general are
characterised by being firmly rooted in micro economic theory, including utility maximising
households and profit maximising firms.
9
A more detailed description of the methodology including the CETM model can be found in our 2005-study, which
can be downloaded from www.copenhageneconomics.com.
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The potential economic gains from full market opening in network industries
Comparing the market opening index to the OECD regulatory index
The OECD produces a regulatory index (REGREF) for the same six network industries as we
cover in this study. As the REGREF and the Market Opening Index (MOI) basically set out to
measure the same regulatory aspects, it is interesting to know to what extent they succeed.
To find out, we have calculated the correlation coefficient between the REGREF and the MOI.
If the correlation coefficient is one, it means that the two indices measure the exact same
aspects of market opening. On the other hand, if the correlation coefficient is zero, it means
that the two indices measure completely different aspects of market opening. We find
correlation coefficients to lie within the range of 0.50 to 0.90, cf. Table 8.
Table 8: Correlation between OECD’s REGREF and Copenhagen Economics’ MOI
Telecom
munications
Rail
transport
Electricity
Air transport
Postal
services
Gas
Correlation
1
0.76
0.50
0.61
0.90
0.89
0.84
coefficient
Note: The table shows the correlation coefficient for each industry between REGREF and MOI.
1: The REGREF only has one index for rail transport while passenger and freight transport have a MOI each. We
calculated the correlation coefficient between the REGREF and each of the two MOIs finding coefficients of 0.83
and 0.85 for passenger and freight, respectively.
Source: Copenhagen Economics and OECD (2005), “Product market regulation and productivity growth”, Paris
November 2005, DSTI/EAS/IND/SWP(2005)11.
There are strong similarities between the way the REGREF and MOI are structured since they
are both centred around three core categories:
•
•
•
Barriers to entry
Public ownership
Vertical integration
The MOI includes more questions in the category ‘Barriers to entry’ than does the REGREF, cf.
Table 9. For the remaining two categories, the differences are small, although there is a
tendency for the REGREF to include more questions on ownership.
Table 9: Number of questions in the three categories
Airlines
Telecoms
Electricity
Gas
Post
Rail
------------------------- Number of questions ------------------------Barriers to
entry
REGREF
3
3
3
3
3
2
MOI
11
14
6
7
10
9
Public
ownership
REGREF
1
1
1
3
3
4
MOI
1
1
1
1
1
2
Vertical
integration
REGREF
-
-
2
3
-
1
MOI
1
-
2
2
1
4
Source: Copenhagen Economics and OECD (2005), “Product market regulation and productivity growth”, Paris
November 2005, DSTI/EAS/IND/SWP(2005)11.
In addition to the core categories measuring the regulatory framework, the REGREF includes a
‘Market structure’ category measuring e.g. the number of service providers in an industry. The
MOI does not include market structure as we from the beginning did not want to mix indicators
of how the market reacts to changes in the regulatory framework with the regulatory framework
it self (the core categories).
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The potential economic gains from full market opening in network industries
Appendix 1: Share of network industries in total value added
Table 10: Share of network industries in total value added in the EU15
Industry
Telecommunications
Electricity
Rail transport
Air transport
Gas
Postal services
Share
[percent of total value added]
1.9 %
1.9 %
0.2 %
0.7 %
0.2 %
0.6 %
Total
5.5 %
Note: The table shows value added in network industries as a percentage of total value added in the EU15 in 2001.
Source: GTAP6 database.
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The potential economic gains from full market opening in network industries
Appendix 2: Simulating full market opening in the CETM
Market opening leads to higher productivity and lower mark-ups in network industries. This was
found in our econometric estimations in stage 2. Both lead to an expansion of potential output
for the network industries, the former by pushing the potential supply curve outwards, the latter
by producing at a more efficient level where prices are lower and production is higher.
In the CETM model lower mark-ups do not alter the production process; they merely imply that
extra rents above marginal costs are reduced, which reduces distortions. However, a rise in
productivity alters the production process as it implies that the same level of output can be
produced using less factor inputs from capital and labour. This is illustrated in Figure 4 where
we assume that market opening increases labour productivity only. Hence, the figure shows
how a labour productivity ‘shock’ is implemented in the model. We do not make any
assumptions regarding changes in factor prices so the points, A and B, in the figure simply
illustrate hypothetical production points.
Figure 4: Illustration of higher labour productivity in the CETM
Capital (K)
Y1=Y0
K0
A
B
Y=Y0
L1
L0
Labour (L)
Source: Copenhagen Economics.
The figure illustrates how output Y0 is produced using K0 and L0 in the initial equilibrium. Higher
labour productivity due to market opening shifts the isoquants inward such that the same level
of output can be produced using less labour (L1) and the same level of capital (K0).
Consequently, we move from point A to point B.
Based on these new production possibilities, the model simulates a new steady state. The new
steady state will often imply both a price reduction and a rise in output as lower prices are
required for households to demand the higher supply. This also implies that the change in the
value of output will be smaller than the change in output measured in fixed prices (or units).
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