Merger incentives under yardstick competition: A theoretical model
Year: 2016
Type: preprint
Abstract: Are the incentives for firms to merge horizontally under yardstick regulation actually aligned with social and consumer welfare ? Natural monopoly operators regulated by yardstick competition, such as electricity network operators and water distribution utilities, have merged repeatedly in recent years. In the context of regulated network industries, yardstick competition implies that firms compete on costs, given that their revenue allowance is based on cost observations from similar firms (peers). Whereas regulators have raised concerns about horizontal mergers under yardstick competition, traditional economic theory suggests that this restructuring should not lead to (unilateral) anticompetitive effects. In our theoretical model, by contrast, firm incentives for horizontal mergers involving peers are only aligned with social and consumer welfare if effciency gains are sufficiently large. We go on to show how regulators can better align firm incentives with welfare considerations and limit the need for costly merger control by adapting the yardstick regime to the domestic industry structure.
Author: Jonas Teusch
Institution: University of Liège
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2562143180