On the optimality of the yardstick regulation in the presence of dynamic interaction

Bisceglia, Michele and Cellini, Roberto and Grilli, Luca (2019): On the optimality of the yardstick regulation in the presence of dynamic interaction.

Abstract

This paper proposes a generalization of Shleifer's (1985) model of yardstick competition, to a dynamic framework. Specifically, we consider a differential game and we show that the yardstick mechanism is effective to replicate the first-best solution if players adopt open-loop behaviour rules and they are symmetric at the initial time; in the absence of initial symmetry, the social efficiency is reached only in the asymptotic steady state. On the contrary, if players adopt Markovian behaviour rules, then the yardstick pricing rule is not able to achieve the first-best solution along the equilibrium path of any Markov Perfect Nash Equilibrium.

• Item Type: MPRA Paper
• Language: English
• Keywords: Yardstick competition; Dynamic price regulation; Differential games.
• Subjects: C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C73 - Stochastic and Dynamic Games ; Evolutionary Games ; Repeated Games; L - Industrial Organization > L5 - Regulation and Industrial Policy > L51 - Economics of Regulation

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