UNIVERSITA' CATTOLICA DEL SACRO CUORE - Milano - Istituti

separation of wholesale and retail businesses. Similarly, last year in Australia the
proposal of structural separation of Telstra has been extensively discussed.
Apart from country-specific factors, a series of common arguments have been
used by both supporters and opponents of separation. Broadly speaking, points in
favour and against may be identified inside the preceding analysis of benefits and
drawbacks of each approach; for this reason the contrasting arguments are only
reported in a few words. Further, it also emerges quite naturally that often the
advantages of structural approaches are the complement of a disadvantage of
vertical integration, and vice versa. Hence, separation eliminates incentives to
discrimination and squeezing arising with integration, but entails loss of
economies of scope which could be exploited under integration.
Other aspects still deserve a separate analysis: by way of example, it is argued that
structural separation would harm competing Olo as well as final customers in so
far as it leads to higher access charge 58 and the separated infrastructure company
does not face competitive pressure and may become increasingly X-inefficient.
Other efficiency concerns are related to the fact that, according to the specific
design of separation, the infrastructure activity may not be constrained by the
equity market.
With reference to parity of treatment, the fear is that discrimination may be
reverted, in so far as the incumbent is bound to use the separated network whilst
competitors may build their own (likely more efficient) infrastructure. Further, it
is felt by some commentators that the relative value of the retail and network
activity would depend on arbitrary access prices, thus generating uncertainty for
shareholders and putting the government into a conflicting position whenever it
possess stake in one of the separated companies.
A key issue is represented by the one-shot costs of structural separation; these
costs obviously vary with the type of separation required, but in any case should
be taken into account when assessing the desirability of separation: for example,
Verizon argued before the Pennsylvania Commission that a one-time cost of over
$800 million would be incurred to implement full structural separation, in addition
to a continuing cost of $300 million per year.
Another, possibly the most, crucial point is related to the incentives for the
upstream separated activity to invest in innovation and network development and
maintenance, as well as to be responsive or proactive to market needs. By way of
example, uncertainty about the timing, nature and gains from innovation increases
transaction costs between infrastructure owner and downstream Tlc service
providers, and by consequence it may limit or eliminate completely the incentive
to invest. Similarly, the controlling entity may have no incentives to invest the
socially optimal amount of resources in innovation, unless some (likely imperfect)
incentive mechanisms were set up by regulators.
A number of minor issues could be discussed, but their implications are often
dependent on the specific design of the separation proposal; a general treatment
58 This economic argument is briefly treated in MACQUARIE RESEARCH EQUITIES [2003], p. 8-9.
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