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Spatial price homogeneity as a mechanism to reduce the threat of regulatory intervention in locally monopolistic sectors

  • Magnus Söderberg

    ()

    (CERNA - Centre d'économie industrielle - MINES ParisTech - École nationale supérieure des mines de Paris)

  • Makoto Tanaka

    ()

    (GRIPS - National Graduate Institute for Policy Studies - National Graduate Institute for Policy Studies)

We claim that a reason for why unregulated investor-owned local monopolies do not always charge the monopoly price is that they are threatened by customer complaints that may lead to retaliations from local elected officials. When investor-owned monopolies are exposed to this threat they will mimic the price(s) of their neighbour(s); the stronger the threat, the higher the spatial price correlation. The threat increases when elected officials have pro-consumer preferences and neighbours are geographically close. The empirical analysis, based on a complete cross-sectional data set from the Swedish district heating sector in 2007, confirms the theoretical predictions.

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Date of creation: 2012
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Handle: RePEc:hal:wpaper:hal-00659458
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