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A Modified Yardstick Competition Mechanism

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Author Info

  • Georg Meran

    (DIW Berlin (German Institute for Economic Research))

  • Christian von Hirschhausen

    () (Chair of Energy Economics and Public Sector Management, Technische Universität Dresden)

Abstract

This paper analyzes a modified yardstick competition mechanism (MYC), where the yardstick employed consists of a tariff basket and total costs. This mechanism has a significant information advantage: the regulator ”only” needs to observe total costs and output of all firms. The modified yardstick competition mech- anism can ensure a socially optimal outcome when allowing for spatial and second degree price discrimination, without increas- ing the informational requirements. We also introduce regulatory lags in the model. A systematic comparison between the results of traditional yardstick regulation and modified yardstick regu- lation is carried out. Finally, we discuss the applicability of the mechanism.

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Bibliographic Info

Paper provided by Center for Network Industries and Infrastructure (CNI) in its series Working Papers with number 2006-05.

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Length: 30 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:cni:wpaper:2006-05

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Keywords: regulation; yardstick competition; mechanism design; information asymmetry;

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References

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  1. Damme, E.E.C. van & Potters, J.J.M. & Rockenbach, B. & Sadrieh, A., 2003. "Collusion under Yardstick Competition: An Experimental Study," Discussion Paper 2003-009, Tilburg University, Tilburg Law and Economic Center.
  2. Tangerås, Thomas P., 1999. "Collusion-Proof Yardstick Competition," Seminar Papers 674, Stockholm University, Institute for International Economic Studies.
  3. Andrei Shleifer, 1985. "A Theory of Yardstick Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 319-327, Autumn.
  4. Chakravorty Ujjayant & Hochman Eithan & Zilberman David, 1995. "A Spatial Model of Optimal Water Conveyance," Journal of Environmental Economics and Management, Elsevier, vol. 29(1), pages 25-41, July.
  5. Goldman, M Barry & Leland, Hayne E & Sibley, David S, 1984. "Optimal Nonuniform Prices," Review of Economic Studies, Wiley Blackwell, vol. 51(2), pages 305-19, April.
  6. Sappington, David E M & Sibley, David S, 1988. "Regulating without Cost Information: The Incremental Surplus Subsidy Scheme," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(2), pages 297-306, May.
  7. Dag Morten Dalen, 1998. "Yardstick Competition and Investment Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(1), pages 105-126, 03.
  8. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
  9. Vogelsang, Ingo, 1988. "A Little Paradox in the Design of Regulatory Mechanisms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 467-76, August.
  10. Reinhard Selten, 1974. "Reexamination of the Perfectness Concept for Equilibrium Points in Extensive Games," Working Papers 023, Bielefeld University, Center for Mathematical Economics.
  11. Spence, Michael, 1977. "Nonlinear prices and welfare," Journal of Public Economics, Elsevier, vol. 8(1), pages 1-18, August.
  12. Armstrong, M. & Cowan, S. & Vickers, J., 1992. "Nonlinear Pricing and Price Cap Regulation," Economics Series Working Papers 99152, University of Oxford, Department of Economics.
  13. Finsinger, Jorg & Vogelsang, Ingo, 1981. "Alternative Institutional Frameworks for Price Incentive Mechanism," Kyklos, Wiley Blackwell, vol. 34(3), pages 388-404.
  14. Kevin Currier, 2005. "Strategic Firm Behavior Under Average-Revenue-Lagged Regulation," Journal of Regulatory Economics, Springer, vol. 27(1), pages 67-79, September.
  15. Joel Sobel, 1999. "A Reexamination of Yardstick Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(1), pages 33-60, 03.
  16. Ingo Vogelsang & Jorg Finsinger, 1979. "A Regulatory Adjustment Process for Optimal Pricing by Multiproduct Monopoly Firms," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 157-171, Spring.
  17. Greene, William, 2005. "Reconsidering heterogeneity in panel data estimators of the stochastic frontier model," Journal of Econometrics, Elsevier, vol. 126(2), pages 269-303, June.
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Cited by:
  1. David Sappington & Dennis Weisman, 2010. "Price cap regulation: what have we learned from 25 years of experience in the telecommunications industry?," Journal of Regulatory Economics, Springer, vol. 38(3), pages 227-257, December.

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