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On the optimality of the yardstick regulation in the presence of dynamic interaction

Author

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  • Bisceglia, Michele
  • Cellini, Roberto
  • Grilli, Luca

Abstract

This paper proposes a generalization of Shleifer's (1985) model of yardstick competition, to a dynamic framework. Specifically, we consider a differential game and we show that the yardstick mechanism is effective to replicate the first-best solution if players adopt open-loop behaviour rules and they are symmetric at the initial time; in the absence of initial symmetry, the social efficiency is reached only in the asymptotic steady state. On the contrary, if players adopt Markovian behaviour rules, then the yardstick pricing rule is not able to achieve the first-best solution along the equilibrium path of any Markov Perfect Nash Equilibrium.

Suggested Citation

  • Bisceglia, Michele & Cellini, Roberto & Grilli, Luca, 2019. "On the optimality of the yardstick regulation in the presence of dynamic interaction," MPRA Paper 94946, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:94946
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    File URL: https://mpra.ub.uni-muenchen.de/94946/1/MPRA_paper_94946.pdf
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    References listed on IDEAS

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    1. Cellini, Roberto & Siciliani, Luigi & Straume, Odd Rune, 2018. "A dynamic model of quality competition with endogenous prices," Journal of Economic Dynamics and Control, Elsevier, vol. 94(C), pages 190-206.
    2. Potters, Jan & Rockenbach, Bettina & Sadrieh, Abdolkarim & van Damme, Eric, 2004. "Collusion under yardstick competition: an experimental study," International Journal of Industrial Organization, Elsevier, vol. 22(7), pages 1017-1038, September.
    3. Kurt R. Brekke & Roberto Cellini & Luigi Siciliani & Odd Rune Straume, 2012. "Competition in Regulated Markets with Sluggish Beliefs about Quality," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 21(1), pages 131-178, March.
    4. Flavio M. Menezes & Jorge Pereira, 2017. "Emissions abatement R&D: Dynamic competition in supply schedules," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(4), pages 841-859, August.
    5. Faure-Grimaud, A. & Reiche, S., 2006. "Dynamic yardstick mechanisms," Games and Economic Behavior, Elsevier, vol. 54(2), pages 316-335, February.
    6. Siciliani, Luigi & Rune Straume, Odd & Cellini, Roberto, 2013. "Quality competition with motivated providers and sluggish demand," Journal of Economic Dynamics and Control, Elsevier, vol. 37(10), pages 2041-2061.
    7. Michele Bisceglia & Roberto Cellini & Luca Grilli, 2019. "Quality Competition in Healthcare Services with Regional Regulators: A Differential Game Approach," Dynamic Games and Applications, Springer, vol. 9(1), pages 1-23, March.
    8. Tangeras, Thomas P., 2002. "Collusion-proof yardstick competition," Journal of Public Economics, Elsevier, vol. 83(2), pages 231-254, February.
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    10. Georg Meran & Christian Hirschhausen, 2009. "A modified yardstick competition mechanism," Journal of Regulatory Economics, Springer, vol. 35(3), pages 223-245, June.
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    12. Ken-Ichi Akao, 2008. "Tax schemes in a class of differential games," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 35(1), pages 155-174, April.
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    14. Meya, Johannes, 2015. "Dynamics of yardstick regulation: Historical cost data and the ratchet effect," University of Göttingen Working Papers in Economics 244, University of Goettingen, Department of Economics.
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    Cited by:

    1. Bisceglia, Michele & Cellini, Roberto & Siciliani, Luigi & Straume, Odd Rune, 2020. "Optimal dynamic volume-based price regulation," International Journal of Industrial Organization, Elsevier, vol. 73(C).

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    More about this item

    Keywords

    Yardstick competition; Dynamic price regulation; Differential games.;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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