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Price mimicking under cost-of-service regulation: the Swedish water sector

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  • Erik Lundin

    (Research Institute of Industrial Economics)

Abstract

This study provides an empirical test of price mimicking among publicly owned water utilities. Using a fixed effects spatial Durbin model with data from Swedish municipalities during 2002–2012, I estimate the elasticity of the own relative to neighbors’ average price to 0.14. This behavior can be explained in terms of an informal yardstick competition: when consumers use neighboring municipalities’ prices as benchmarks for costs or as behaviorally based reference prices, policy makers will face the risk of consumer complaints and reduced voter support if deviating too much from neighboring municipalities’ prices. Further, I find some evidence that price mimicking is more pronounced in municipalities where voter support for the ruling coalition is weak.

Suggested Citation

  • Erik Lundin, 2017. "Price mimicking under cost-of-service regulation: the Swedish water sector," Journal of Regulatory Economics, Springer, vol. 52(3), pages 313-332, December.
    • Handle: RePEc:kap:regeco:v:52:y:2017:i:3:d:10.1007_s11149-017-9345-7
    DOI: 10.1007/s11149-017-9345-7
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    More about this item

    Keywords

    Yardstick competition; Spatial econometrics; Public economics; Water utilities; Price mimicking;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L32 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Enterprises; Public-Private Enterprises
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities

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