Working Paper Series
Strategic Interaction vs. Regulatory Compliance among Regulated Utilities: The Swedish Water Sector
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'
Keywords: Yardstick competition; Spatial econometrics; Public economics; Utilities; (follow links to similar papers)
JEL-Codes: D40; L10; L50; L90; (follow links to similar papers)
29 pages, December 18, 2013
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