The Missing Link between Coherence and Performance in Network Industries

The institutional governance of many network industries has been undergoing fundamental developments over the last two decades driven by liberalization efforts and industry restructuring programs aiming at an improvement of the sector performance. Experience has shown that one of the factors explaining the performance of network industries is the degree of coherence between the technology of the network and the institutions that govern the network. This paper examines the relationship between coherence and performance in network industries more closely and further develops the existing concepts. It is proposed that the missing link between coherence and performance is played by the concept of network constraints (capacity constraint, controllability constraint, interoperability and interconnection constraint). It is shown that the degree to which coherence is able to explain the performance of network industries depends on the sector-specific importance of network constraints. To get a better understanding of this dependency, several network sectors (electricity, gas, air traffic, rail, road, water, telecom, postal) are categorized according to the relevance of their network constraints. At the example of the European electricity and air traffic sectors, it is examined in more detail how (in)coherence affects sector performance, and it is illustrated why coherence is getting increasingly important to maintain or even improve sector performance.