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Informal Benchmarks as a Source of Regulatory Threat in Unregulated Utility Sectors

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  • Magnus Söderberg

Abstract

This paper investigates to what extent unregulated local monopolies attempt not to evoke the introduction of a formal price regulation by conforming to customers’ and authorities’ expectations. It is argued that utilities can meet expectations by setting prices that imitate neighbours’ prices. The empirical evaluation rests on a cross-sectional data set representing all Swedish district heating utilities, and on a flexible nonlinear IV specification. It is found that while utilities’ price setting schemes are insensitive to customer complaints, they are significantly influenced by the passive monitoring by authorities. The spillover effect from the 5-6 closest neighbours is around 40 %.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-03/cesifo1_wp2973.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2973.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_2973

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Related research

Keywords: regulatory threat; spatial correlation; price; district heating; Sweden;

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References

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  1. repec:rne:rneart:v:8:y:2009:i:3:p:212-232 is not listed on IDEAS
  2. Revelli, Federico, 2006. "Performance rating and yardstick competition in social service provision," Journal of Public Economics, Elsevier, Elsevier, vol. 90(3), pages 459-475, February.
  3. Christopher R. Knittel, 2003. "Market Structure and the Pricing of Electricity and Natural Gas," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 51(2), pages 167-191, 06.
  4. Magnus Söderberg, 2008. "Uncertainty and regulatory outcome in the Swedish electricity distribution sector," European Journal of Law and Economics, Springer, Springer, vol. 25(1), pages 79-94, February.
  5. Joris Pinkse & Margaret E. Slade & Craig Brett, 2002. "Spatial Price Competition: A Semiparametric Approach," Econometrica, Econometric Society, Econometric Society, vol. 70(3), pages 1111-1153, May.
  6. Lutz, Stefan & Lyon, Thomas P & Maxwell, John W, 1998. "Strategic Quality Choice with Minimum Quality Standards," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1793, C.E.P.R. Discussion Papers.
  7. Chisari Omar & Kessides Ioannis N., 2009. "Pricing Dynamics of Network Utilities in Developing Countries," Review of Network Economics, De Gruyter, De Gruyter, vol. 8(3), pages 1-21, September.
  8. Ingo Vogelsang, 2010. "Incentive Regulation, Investments and Technological Change," CESifo Working Paper Series 2964, CESifo Group Munich.
  9. Gert Brunekreeft, 2004. "Regulatory Threat in Vertically Related Markets: The Case of German Electricity," European Journal of Law and Economics, Springer, Springer, vol. 17(3), pages 285-305, May.
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