Implicit Yardstick Competition

Petyo Bonev (), Matthieu Glachant and Magnus Söderberg

No 2009, Economics Working Paper Series from University of St. Gallen, School of Economics and Political Science

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.

Keywords: Monopoly; price setting; spatial interaction; natural experiment; yardstick competition (search for similar items in EconPapers)
JEL-codes: L12 L43 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2020-06
New Economics Papers: this item is included in nep-eec
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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