Local Monopoly, Network Effects and Technical Efficiency – Evidence from Taiwan’s Natural Gas Industry

Abstract

This paper examines the optimal number of natural gas firms in each region of Taiwan. In order to separate large local monopoly companies from the small ones, this paper constructs a firm-level panel data analysis for the industry covering the period 1995-1999. The optimal number of firms in each region is estimated by using the minimum efficient scale theory. In addition, a non-neutral stochastic frontier production function is used to detect the impact of the local monopoly, the network effects and cost structure on the natural gas firms’ technical efficiency.

Keywords: Local monopoly, network effect, non-neutral stochastic frontier production function, technical efficiency, natural gas industry

JEL Classification: D42, L95, O30