Price mimicking under cost-of-service regulation: the Swedish water sector

Erik Lundin

Journal of Regulatory Economics, 2017, vol. 52, issue 3, No 4, 313-332

Abstract: Abstract This study provides an empirical test of price mimicking among publicly owned water utilities. Using a fixed effects spatial Durbin model with data from Swedish municipalities during 2002–2012, I estimate the elasticity of the own relative to neighbors’ average price to 0.14. This behavior can be explained in terms of an informal yardstick competition: when consumers use neighboring municipalities’ prices as benchmarks for costs or as behaviorally based reference prices, policy makers will face the risk of consumer complaints and reduced voter support if deviating too much from neighboring municipalities’ prices. Further, I find some evidence that price mimicking is more pronounced in municipalities where voter support for the ruling coalition is weak.

Keywords: Yardstick competition; Spatial econometrics; Public economics; Water utilities; Price mimicking (search for similar items in EconPapers)
JEL-codes: D42 L32 L43 L51 L95 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1007/s11149-017-9345-7

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