A Modified Yardstick Competition Mechanism
AbstractThis 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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Bibliographic InfoPaper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 559.
Length: 29 p.
Date of creation: 2006
Date of revision:
Regulation; Yardstick competition; Mechanism design; Information asymmetry;
Other versions of this item:
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- D40 - Microeconomics - - Market Structure and Pricing - - - General
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