On the origins of vertical unbundling: The case of the French transportation industry in the nineteenth century

Abstract

This paper retraces the origins of the unbundling of infrastructure, which is a monopoly, from services, which are subject to competition. Using the case of the railroad industry in France, I examine how both natural monopoly theorists and legislation dealt with this subject in the nineteenth century. I argue that the origins of vertical unbundling date to this period with legislation pertaining to inland waterways and railroads. This was particularly the case for the railroad industry due to pricing and competition rationales. I analyze the writings of Dupuit and Walras, and show that they both agreed that infrastructure and services had to be unbundled for the inland waterways. In contrast, they expressed different justifications to defend the monopoly for the railroad industry. Following a chronological progression, the first section explores the origins of unbundling in legislation. The second section analyzes how theorists approached the way railroads had to be managed. Throughout, I highlight the interplay between their work and legislation.

Keywords:

• Unbundling
• natural monopoly
• railroads
• regulation
• infrastructure
• services
• inland waterways

JEL Classification:

• B10
• D42
• L51
• L92

Acknowledgements

The author is indebted to François Etner, Manuela Mosca, Crystal Fleming and the two anonymous referees for their helpful remarks on previous versions of this article. The usual caveats apply. Unless otherwise noted, all translations are the authors' own.

Notes

 1 This means that, prior to unbundling, infrastructure and services were vertically integrated and managed by a single monopoly. In the railroads, infrastructure is comprised of the ‘works which constitute the body of the road’; that is, ‘rubble, embankments, tunnels’ and construction works ‘similar to those who would be necessary for a road’ (Deharme 1890: 47). Infrastructure comes with the superstructure, which is comprised of ‘the road, the ballast, the stations along with facilities’ – like switching, signaling and security equipments – and also rolling stock (Deharme 1890: 47). The services designate the transportation of merchandise or passengers (and related activities such as loading/unloading) from a point A to a point B along with management of commercial operations like booking and customer service.

 2 According to Term 1, there are three different systems: the accounting unbundling is compulsory, and institutional unbundling (the removal of capitalistic ties between entities) and organic unbundling (holding company–subsidiary relationship) are optional.

 3 For an extended analysis of French railroad legislation and concession contracts in the nineteenth century, see Numa (2009a).

 4 The toll covers the infrastructure costs (construction and maintenance) whereas the transportation fare covers the costs of commercial activity.

 5 Unless noted otherwise, all translations of non-English texts and authors are mine.

 6 Details about these security problems are sketchy. Bricka, Colson and Picard might have considered that switching techniques were not developed enough to manage a heavy traffic caused by the circulation of competitive trains.

 7 This act was an original model of Public–Private Partnership (PPP) as the state was to pay for the ‘lands and facilities, excavation works, architectural works and stations will be paid by the state’ (5th Clause), while ‘the tracks … , the equipment and operation expenses, maintenance expenses and reparation of the railroad … [were to be] in charge of the companies whose operation of the railroad will be contracted out’. However, this form of PPP was not carried out, as the state directly contracted with the companies for both construction and operation of the railroads, due to a legislative amendment initiated by the député Prosper Duvergier de Hauranne (Picard 1884: 279–81).

 8 I carefully and extensively explored the French engineer-economists' literature without finding any reference to vertical unbundling other than those of Dupuit and Walras.

 9 See Dupuit (1853a, 1853b) and Société d'Economie Politique (1853).

10 ‘Toute voie de communication qui est un monopole doit être exploitée par l'Etat, toute voie de communication qui est accessible à la concurrence doit être exploitée par l'industrie privée’.

11 On the natural monopoly in Mill's work, see Numa (2010).

12 Walras' original words in this paragraph are: ‘l'établissement et l'exploitation d'une voie ferrée, comme ceux d'une route ou d'un canal, échappent donc par nature à la concurrence. Mais il y a plus: si la route et le canal, considérés en eux-mêmes, constituent un monopole naturel, au moins la traction qui s'y opère rentre dans les conditions de la concurrence par la raison qu'un nombre indéfini de voitures et de bateliers peuvent rouler sur la route ou naviguer sur le canal. Le péage, si on le maintient, se paie à un monopoleur; mais le frêt se paie à des entrepreneurs concurrents. Dans les chemins de fer, au contraire, la voie constitue un monopole naturel et la traction en constitue un autre essentiellement lié au premier par la raison que, comme nous l'avons dit, un nombre indéfini de compagnies d'exploitation ne peuvent faire circuler sur les rails leurs convois de voyageurs et de marchandises. Ici, le loyer de la voie et le loyer des véhicules et des moteurs, le péage et le frêt, tout se paie à un monopoleur. C'est donc, par tous ces motifs, une véritable aberration que d'invoquer la liberté de l'industrie en matière de chemins de fer’. Ekelund and Hébert's translation of the previous quote is truncated and erroneous. They write: ‘the establishment and operation of a railway, like that of a highway or canal, escapes competition by its very nature. But there is a difference: if the highway and the canal constitute a natural monopoly in and of themselves, at least competition might exist between entrepreneurs on return traffic because roads and canals can accommodate an unlimited number of cars and/or boatmen. On the contrary, the tracks of a particular railroad constitute a natural monopoly because the company that owns the track does not allow other companies to ship passengers and merchandise on it. In this case, the rent of the track, cars and engines, the toll, and the freight are all paid to a monopolist’ (Ekelund and Hébert 2003: 666, footnote 20). It does not faithfully transcribe Walras' words on the double natural monopoly of the railroads.

13 The Cézanne report was issued on 8 February 1873. The law that derived from the report was published in the Journal Officiel of 20, 21 and 22 February of the same year, becoming effective on those dates.

14 For example, Hadley (1886) also distinguished infrastructure and train operations for the transportation networks, which he described as natural monopolies. He considered that transportation history consisted of two periods. In the first, which corresponded to the roads and waterways, ‘the highway and the carrier were sharply distinguished. The highway, whether road or river, would have constituted a natural monopoly, if it had been made the subject of private ownership’ (Hadley 1886: 29). It is what Hadley called ‘the general law of transportation’. The second period corresponded to the railroad industry and telegraphs. For these two industries, ‘it was an obvious advantage, if not a necessity, to have the line and the business owned and controlled by the same head’ (Hadley 1886: 30–1).