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Implicit Yardstick Competition

Author

Listed:
  • Bonev, Petyo
  • Matthieu Glachant
  • Magnus Söderberg

Abstract

We examine a novel regulatory mechanism, in which otherwise unrelated monopolists are in implicit price competition. The mechanism resembles the classical yardstick competition, however the reference standard is set not by the regulator but by the customers. They demand fair prices and infer about the price fairness through a spatial price comparison. We test this mechanism using a unique dataset on unregulated District Heating natural monopolists in Sweden. To account for the endogeneity of reference prices, we use a novel instrument that utilizes a shock on the demand side triggered by an unanticipated policy reform. We find a large effect of reference prices on prices, which indicates that the implicit yardstick competition has a considerable disciplining effect on monopoly prices.

Suggested Citation

  • Bonev, Petyo & Matthieu Glachant & Magnus Söderberg, 2020. "Implicit Yardstick Competition," Economics Working Paper Series 2009, University of St. Gallen, School of Economics and Political Science.
    • Handle: RePEc:usg:econwp:2020:09
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    File URL: http://ux-tauri.unisg.ch/RePEc/usg/econwp/EWP-2009.pdf
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    References listed on IDEAS

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    Cited by:

    1. Egüez, Alejandro, 2021. "District heating network ownership and prices: The case of an unregulated natural monopoly," Utilities Policy, Elsevier, vol. 72(C).

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    More about this item

    Keywords

    Monopoly; price setting; spatial interaction; natural experiment; yardstick competition;
    All these keywords.

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation

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