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Strategic Interaction vs. Regulatory Compliance among Regulated Utilities: The Swedish Water Sector

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  • Lundin, Erik

    (Research Institute of Industrial Economics (IFN))

Abstract

This study provides the first empirical test of strategic interactions in the pricing decisions of regulated utilities. Since publicly owned water utilities in Sweden are governed by a cost-of-service regulation, prices in neighboring municipalities should not affect the own price other than through spatially correlated cost factors. In contrast, spatial dependence is pronounced. This behavior can be explained in terms of an informal yardstick competition: When consumers use neighboring utilities' prices as benchmarks for costs or as behaviorally based reference prices, utilities will face the risk of consumer complaints and successive regulatory reviews if deviating too much from neighbors' prices.

Suggested Citation

  • Lundin, Erik, 2013. "Strategic Interaction vs. Regulatory Compliance among Regulated Utilities: The Swedish Water Sector," Working Paper Series 998, Research Institute of Industrial Economics.
    • Handle: RePEc:hhs:iuiwop:0998
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    References listed on IDEAS

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    1. Théophile AZOMAHOU & Agénor LAHATTE, 2000. "On the Inconsistency of the Ordinary Least Squares Estimator for Spatial Autoregressive Processes," Working Papers of BETA 2000-12, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
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    4. Besley, Timothy & Case, Anne, 1995. "Incumbent Behavior: Vote-Seeking, Tax-Setting, and Yardstick Competition," American Economic Review, American Economic Association, vol. 85(1), pages 25-45, March.
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    More about this item

    Keywords

    Yardstick competition; Spatial econometrics; Public economics; Utilities;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • L90 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - General

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