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A Modified Yardstick Competition Mechanism

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  • Georg Meran
  • Christian von Hirschhausen

Abstract

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 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.

Suggested Citation

  • Georg Meran & Christian von Hirschhausen, 2006. "A Modified Yardstick Competition Mechanism," Discussion Papers of DIW Berlin 559, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp559
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    References listed on IDEAS

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    1. Tangeras, Thomas P., 2002. "Collusion-proof yardstick competition," Journal of Public Economics, Elsevier, vol. 83(2), pages 231-254, February.
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    9. 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.
    10. Kevin Currier, 2005. "Strategic Firm Behavior Under Average-Revenue-Lagged Regulation," Journal of Regulatory Economics, Springer, vol. 27(1), pages 67-79, September.
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    Citations

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    Cited by:

    1. Meya, Johannes, 2013. "Dynamics of Yardstick Regulation: Historical Cost Data and the Ratchet E ffect," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79796, Verein für Socialpolitik / German Economic Association.
    2. David Sappington & Dennis Weisman, 2010. "Price cap regulation: what have we learned from 25 years of experience in the telecommunications industry?," Journal of Regulatory Economics, Springer, vol. 38(3), pages 227-257, December.
    3. Harada, Shumpei & Yamauchi, Hirotaka, 2014. "Yardstick Competition And Franchise Bidding: A Comparative Analysis Based On Asymmetric Information," Hitotsubashi Journal of commerce and management, Hitotsubashi University, vol. 48(1), pages 31-42, January.
    4. TEUSCH, Jonas, 2016. "Merger Incentives Under Yardstick Competition : a Theoretical Model," CORE Discussion Papers 2016037, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Georg Meran, 2012. "Europäische Preisregulierungssysteme in der Wasserwirtschaft: Konzepte und Umsetzungsprobleme," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 81(1), pages 167-181.

    More about this item

    Keywords

    Regulation; Yardstick competition; Mechanism design; Information asymmetry;

    JEL classification:

    • 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, Pricing, and Design - - - General

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