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A Modified Yardstick Competition Mechanism

  • Georg Meran

    (DIW Berlin (German Institute for Economic Research))

  • Christian von Hirschhausen

    ()

    (Chair of Energy Economics and Public Sector Management, Technische Universität Dresden)

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

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File URL: http://www.cni.tu-berlin.de/fileadmin/documents/RePEc/cni/working_paper/meran_hirschhausen_2006-a_modified_yardstick_competition_mechanism-cni_wp_no_2006-05.pdf
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Paper provided by Center for Network Industries and Infrastructure (CNI) in its series Working Papers with number 2006-05.

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Length: 30 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:cni:wpaper:2006-05
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  1. Joel Sobel, 1999. "A Reexamination of Yardstick Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(1), pages 33-60, 03.
  2. Kevin Currier, 2005. "Strategic Firm Behavior Under Average-Revenue-Lagged Regulation," Journal of Regulatory Economics, Springer, vol. 27(1), pages 67-79, September.
  3. 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.
  4. Armstrong, M. & Cowan, S. & Vickers, J., 1992. "Nonlinear Pricing and Price Cap Regulation," Economics Series Working Papers 99152, University of Oxford, Department of Economics.
  5. Potters, J.J.M. & Rockenbach, B. & Sadrieh, A. & van Damme, E.E.C., 2004. "Collusion under yardstick competition : An experimental study," Other publications TiSEM 2f5fc044-063c-477d-bf98-d, Tilburg University, School of Economics and Management.
  6. 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.
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  8. Tangeras, T.P., 1999. "Collusion-Proof Yardstick Competition," Papers 674, Stockholm - International Economic Studies.
  9. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
  10. Spence, Michael, 1977. "Nonlinear prices and welfare," Journal of Public Economics, Elsevier, vol. 8(1), pages 1-18, August.
  11. Dag Morten Dalen, 1998. "Yardstick Competition and Investment Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(1), pages 105-126, 03.
  12. Reinhard Selten, 1974. "Reexamination of the Perfectness Concept for Equilibrium Points in Extensive Games," Center for Mathematical Economics Working Papers 023, Center for Mathematical Economics, Bielefeld University.
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  14. Takayama,Akira, 1985. "Mathematical Economics," Cambridge Books, Cambridge University Press, number 9780521314985, November.
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  16. 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.
  17. 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.
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