Price mimicking under cost-of-service regulation: the Swedish water sector
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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.
KeywordsYardstick competition Spatial econometrics Public economics Water utilities Price mimicking
JEL ClassificationD42 L32 L43 L51 L95
I would like to thank Richard Friberg, Pär Holmberg, two anonymous referees, and participants at the 2014 ENTER-Jamboree for valuable comments. Financial support from the Jan Wallander and Tom Hedelius Foundation (Grant nr H13-0467) and the Swedish Competition Authority is greatly appreciated.
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