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

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  • Magnus Söderberg

    () (CERNA i3 - Centre d'économie industrielle i3 - MINES ParisTech - École nationale supérieure des mines de Paris - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique)

  • Makoto Tanaka

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

Abstract

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.

Suggested Citation

  • Magnus Söderberg & Makoto Tanaka, 2012. "Spatial price homogeneity as a mechanism to reduce the threat of regulatory intervention in locally monopolistic sectors," Working Papers hal-00659458, HAL.
  • Handle: RePEc:hal:wpaper:hal-00659458
    Note: View the original document on HAL open archive server: https://hal-mines-paristech.archives-ouvertes.fr/hal-00659458
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    Cited by:

    1. Erik Lundin, 2017. "Price mimicking under cost-of-service regulation: the Swedish water sector," Journal of Regulatory Economics, Springer, vol. 52(3), pages 313-332, December.

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