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A Modified Yardstick Competition Mechanism

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Author Info

  • Georg Meran
  • Christian von Hirschhausen

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 mechanism can ensure a socially optimal outcome when allowing for spatial and second degree price discrimination, without increasing the informational requirements. We also introduce regulatory lags in the model. A systematic comparison between the results of traditional yardstick regulation and modified yardstick regulation is carried out. Finally, we discuss the applicability of the mechanism.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.44084.de/dp559.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 559.

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Length: 29 p.
Date of creation: 2006
Date of revision:
Publication status: Published in: Journal of Regulatory Economics 35 (2009), 3, 223-245
Handle: RePEc:diw:diwwpp:dp559

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Related research

Keywords: Regulation; Yardstick competition; Mechanism design; Information asymmetry;

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References

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  1. Finsinger, Jorg & Vogelsang, Ingo, 1981. "Alternative Institutional Frameworks for Price Incentive Mechanism," Kyklos, Wiley Blackwell, vol. 34(3), pages 388-404.
  2. Armstrong, M. & Cowan, S. & Vickers, J., 1992. "Nonlinear Pricing and Price Cap Regulation," Economics Series Working Papers 99152, University of Oxford, Department of Economics.
  3. Potters, J.J.M. & Rockenbach, B. & Sadrieh, A. & Damme, E.E.C. van, 2004. "Collusion under yardstick competition: An experimental study," Open Access publications from Tilburg University urn:nbn:nl:ui:12-141666, Tilburg University.
  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. Dag Morten Dalen, 1998. "Yardstick Competition and Investment Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(1), pages 105-126, 03.
  6. Tangerås, Thomas P., 1999. "Collusion-Proof Yardstick Competition," Seminar Papers 674, Stockholm University, Institute for International Economic Studies.
  7. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
  8. 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.
  9. 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.
  10. 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.
  11. Reinhard Selten, 1974. "Reexamination of the Perfectness Concept for Equilibrium Points in Extensive Games," Working Papers 023, Bielefeld University, Center for Mathematical Economics.
  12. 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.
  13. Spence, Michael, 1977. "Nonlinear prices and welfare," Journal of Public Economics, Elsevier, vol. 8(1), pages 1-18, August.
  14. Joel Sobel, 1999. "A Reexamination of Yardstick Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(1), pages 33-60, 03.
  15. Kevin Currier, 2005. "Strategic Firm Behavior Under Average-Revenue-Lagged Regulation," Journal of Regulatory Economics, Springer, vol. 27(1), pages 67-79, September.
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Citations

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Cited by:
  1. Meya, Johannes, 2013. "Dynamics of Yardstick Regulation: Historical Cost Data and the Ratchet E ffect," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79796, Verein für Socialpolitik / German Economic Association.
  2. 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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