The effect of industry structure and yardstick design on strategic behavior with yardstick competition (original) (raw)

Industry structure and collusion with uniform yardstick competition: Theory and experiments

International Journal of Industrial Organization, 2017

For an industry that is subject to uniform yardstick regulation, we study cartel stability and the impact of cartels on the reg- ulated price. In a theoretical model, an increase in the number of symmetric firms may facilitate collusion. Our laboratory ex- periment suggests that this effect is even stronger than what theory predicts. Theory predicts that firm-size heterogeneity hinders collusion, but leads to higher regulated prices if firms do not collude. In a laboratory experiment we find that the first effect is stronger, implying that in a more heterogeneous industry regulated prices are lower.

Design of yardstick competition and consumer prices: Experimental evidence

Energy Economics, 2017

In this paper we analyze the effect of the design of yardstick competition on consumer prices, by means of a theoretical analysis as well as an economic experiment. We compare four different designs: the uniform yardstick, the unweighted uniform yardstick, the discriminatory yardstick, and the best-practice yardstick. The effect of a specific design on prices depends on two separate mechanisms, one which affects the incentive power to increase productive efficiency and another which affects the risk of collusion. We show theoretically that for the best-practice yardstick, which is widely applied in several industries in a number of countries, these two mechanisms point in the same direction (high prices), which is confirmed by the experiment. Both the theoretical analysis as well as the economic experiment show that the discriminatory yardstick results in lower prices than the unweighted uniform yardstick. The theory, however, does not give a clear answer on the relative performance of the discriminatory versus the weighted uniform yardstick. In the experimental analysis, we find that the advantage of the discriminatory yardstick in terms of giving incentives to improve productive efficiency exceeds the disadvantage of a relatively higher risk of collusion. This conclusion appears to be robust for different degrees of heterogeneity of the industry. Hence the discriminatory yardstick yields the lowest prices for consumers.

Collusion under yardstick competition: an experimental study

International Journal of Industrial Organization, 2004

The effectiveness of relative performance evaluation schemes, such as yardstick competition, can be undermined by collusion. The degree to which the regulated agents manage to collude will be affected by the particulars of the scheme. We hypothesize that in a repeated game setting, schemes will be more prone to collusion the smaller are the rents to the agents, in case they behave noncooperatively. We illustrate the relevance of this hypothesis by means of an economic experiment in which we compare the efficiency of two performance evaluation schemes. D 2004 Elsevier B.V. All rights reserved. JEL classification: C9; L51 study collusion in a static model, and assume that the agents can write and commit to a collusive side contract. We focus on btacit collusion,Q which is supported not by contracts but by repeated game strategies. 1 The term yardstick competition was introduced by Shleifer (1985). Related models and ideas on relative performance evaluation are by Baiman and Demski (1980), .

Cartel formation and pricing: The effect of managerial decision-making rules

2011

We experimentally investigate how the managerial decision-making process affects choices in a Bertrand pricing game with an opportunity to form non-binding cartels. To do so we compare the effects of three decision-making rules for the firm (decisions by CEOs, majority rule and consensus) to each other and to decisions in a benchmark consisting of single-individual firms. It has been argued elsewhere that groups behave more competitively than individuals.

COLLUSION AND FIGHTS IN AN EXPERIMENT WITH PRICE-SETTING FIRMS AND ADVANCE PRODUCTION

Journal of Industrial Economics, 2007

We present results from 50-round market experiments in which firms decide repeatedly both on price and quantity of a completely perishable good. Each firm has capacity to serve the whole market. The stage game does not have an equilibrium in pure strategies. We run experiments for markets with two and three identical firms. Firms tend to cooperate to avoid fights, but when they fight bankruptcies are rather frequent. On average, pricing behavior is closer to that for pure quantity than for pure price competition and price and efficiency levels are higher for two than for three firms. Consumer surplus increases with the number of firms, but unsold production leads to higher efficiency losses with more firms. Over time prices tend to the highest possible one for markets both with two and three firms.

A modified yardstick competition mechanism

Journal of Regulatory Economics, 2009

This paper analyzes a modified yardstick competition mechanism (MYC), where the yardstick employed consists of a tariff basket and total costs. This mechanism has a significant information advantage: the regulator "only" needs to observe total costs and output of all firms. The modified yardstick competition mechanism can ensure a socially optimal outcome when allowing for spatial and second degree price discrimination, without increasing the informational requirements. We also introduce regulatory lags in the model. A systematic comparison between the results of traditional yardstick regulation and modified yardstick regulation is carried out. Finally, we discuss the applicability of the mechanism.

An experimental examination of competitor-based price matching guarantees

Journal of Economic Behavior & Organization, 2009

We use experimental methods to demonstrate the anti-competitive potential of price matching guarantees in both symmetric and asymmetric cost duopolies. Our findings establish that when costs are symmetric, price matching guarantees significantly increase market prices. In markets with cost asymmetries, guaranteed prices remain high relative to prices without the use of guarantees, but the overall ability of price guarantees to act as a collusion facilitating device becomes contingent on the relative cost difference. Lesser use of guarantees, combined with lower average prices and slower convergence to the collusive level, suggests that the mere presence of cost asymmetries may curtail collusive behavior.

Collusion in regulated pluralistic markets

2014

We analyse incentives for cooperative behaviour when heterogeneous providers are faced with regulated prices under yardstick competition. Providers are heterogeneous in the degree to which their interests correspond to those of the regulator, with close correspondence labelled altruism. Deviation of interests may arise as a result of de-nationalisation or when private providers enter predominantly public markets. We assess how provider strategies and incentives to collude relate to provider characteristics under yardstick competition regulation. Our results suggest that under the yardstick competition each provider's choice of cooperative cost is decreasing in the degree of the other provider's altruism, so a selfinterested provider will operate at a lower cost than an altruistic provider. The prospect of defection serves to moderate the chosen level of operating cost. More general results show that collusion is more stable in homogeneous than in heterogeneous markets; in markets served by purely altruistic providers there is no collusion on costs while in markets served by purely self-interested providers there is scope for collusion. Our analysis demonstrates that it is important to consider the composition of the market when designing yardstick competition arrangements.

On the efficiency of price competition

Operations Research Letters, 2011

We study the efficiency of price competition among multi-product firms in differentiated oligopolies. Under a general affine demand model, we show that total surplus (sum of industry profit and consumers' surplus) under competition is at least 75% of the maximum total surplus achievable by a centralized planner. We also show, in contrast to more stylized oligopoly models, that price collusion can increase total surplus and that competition does not, in general, yield a Pareto efficient trade-off between industry profit and consumers' surplus. However, the maximum deviation of total surplus from Pareto optimality is less than 10%. These results have implications regarding the effectiveness of current antitrust regulations.