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Strategic Interaction vs. Regulatory Compliance among Regulated Utilities: The Swedish Water Sector

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  • Lundin, Erik

    ()
    (Research Institute of Industrial Economics (IFN))

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    Abstract

    This study provides the first empirical test of strategic interactions in the pricing decisions of regulated utilities. Since publicly owned water utilities in Sweden are governed by a cost-of-service regulation, prices in neighboring municipalities should not affect the own price other than through spatially correlated cost factors. In contrast, spatial dependence is pronounced. This behavior can be explained in terms of an informal yardstick competition: When consumers use neighboring utilities' prices as benchmarks for costs or as behaviorally based reference prices, utilities will face the risk of consumer complaints and successive regulatory reviews if deviating too much from neighbors' prices.

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    File URL: http://www.ifn.se/wfiles/wp/wp998.pdf
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    Bibliographic Info

    Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 998.

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    Length: 29 pages
    Date of creation: 18 Dec 2013
    Date of revision:
    Handle: RePEc:hhs:iuiwop:0998

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    Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden
    Phone: +46 8 665 4500
    Fax: +46 8 665 4599
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    Web page: http://www.ifn.se/
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    Related research

    Keywords: Yardstick competition; Spatial econometrics; Public economics; Utilities;

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    1. Federico Belotti & Gordon Hughes & Andrea Piano Mortari, 2013. "xsmle—A Command to Estimate Spatial Panel Models in Stata," German Stata Users' Group Meetings 2013 09, Stata Users Group.
    2. David M. Drukker & Ingmar Prucha & Rafal Raciborski, 2013. "Maximum likelihood and generalized spatial two-stage least-squares estimators for a spatial-autoregressive model with spatial-autoregressive disturbances," Stata Journal, StataCorp LP, vol. 13(2), pages 221-241, June.
    3. Bivand, Roger & Szymanski, Stefan, 1997. "Spatial dependence through local yardstick competition:: theory and testing," Economics Letters, Elsevier, vol. 55(2), pages 257-265, August.
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