Market structure and productive technology: The European Union energy sector

Modeling energy as a productive factor requires prior knowledge of the structural peculiarities of each country's energy market and of the technological characterization that best defines the productive processes, Knowledge of the degree of heterogeneity of the E.U.'s energy markets would allow one to more suitably analyze the existence of possible competitive advantages with respect to the new energy areas of Eastern Europe and North Africa, The problem lies in the scarcity of such studies and in that they usually compare heterogeneous energy sectors, thus affecting the validity of their results. The present work describes a different methodological aspect in the treatment of the energy input as a factor of major relevance in an economy The evolution of the empirical modeling used until now presents a certain degree of controversy between structure and flexibility as it has focused on analytical tools and has obviated consideration of the real structure of the energy markets. We hem take the opposite tack, observing the reality of the sector and applying the model translog cast function - in an open form, i.e., without theoretical restrictions or technological limitations. With respect to the energy markets, and unlike most empirical investigations that have been carried out on this topic, we take into account the specific characteristics of the energy sectors of the selected countries. With respect to the theoretical framework, we neither impose a priori restrictions on the model nor fix any technological relationship as the best fit in the relationships to be examined. Our empirical application covers 17 years (1980-1996) and three countries of Southern Europe (Spain Italy, and portugal). This choice of countries was not random, but designed to cover the main market and productive differences of the E.U.'s energy sector. The results associate a more rigid functional form to economies with a simple energy sector, and a more flexible model when the organization of the market is more complex. The relationships between the energy input and the other factors clearly shows the same similarities as have previously been described in the literature: substitution between labour and energy, but mixed capital-energy relationships.