Efficiency and Vertical Integration: The Case of Mine-Mouth Electric Generating Plants

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This paper tests four propositions regarding the efficiency of vertical arrangements. (i) Vertically integrated and non-integrated firms allocate inputs with equal efficiency and (ii) achieve equal technical efficiency. (iii) Upstream transaction-specific investments provide monopsony power and (iv) monopsony behavior does not differ by vertical arrangement. A behavioral cost function for mine-mouth generating plants is estimated. The findings include significant differences in the allocative efficiency of integrated versus non-integrated plants and increased technical efficiency for vertically integrated plants. Transaction-specific investments in mines provide monopsony power. Non-integrated plants exercise this power, while integrated plants do not.