Informal Benchmarks as a Source of Regulatory Threat in Unregulated Utility Sectors
This paper investigates to what extent unregulated local monopolies attempt not to evoke the introduction of a formal price regulation by conforming to customersâ€™ and authoritiesâ€™ expectations. It is argued that utilities can meet expectations by setting prices that imitate neighboursâ€™ prices. The empirical evaluation rests on a cross-sectional data set representing all Swedish district heating utilities, and on a flexible nonlinear IV specification. It is found that while utilitiesâ€™ price setting schemes are insensitive to customer complaints, they are significantly influenced by the passive monitoring by authorities. The spillover effect from the 5-6 closest neighbours is around 40 %.
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