Efficient Industry Structure 35 There are additional benefits attributable to vertical integration as well, namely: 1. Elimination of the "wedge" that results when the upstream firm sells its pro- duct to the downstream firm at a price above economic cost. 2. Mitigation of certain problems that arise due to the separation of ownership of the firm from whoever actually controls it, which is also known as a principal-agent problem. For the presence of economies of vertical integration in the supply of elec- tricity, it must be the case that successive stages of production (generation, transmission, and distribution) are less costly for a single firm to perform than it would be for these functions to be performed by separate producers. Both of these issues are relevant in the production of electricity, the underlying production technology of which not only lends itself to economies of scale but also to economies of vertical integration. Defining Vertical Integration Mathematically, economies of vertical integration exist if the following is satis- fied: