Strategic Behaviour in Network Industries

Strategic Behaviour in Network Industries

A Multidisciplinary Approach

Ernst ten Heuvelhof, Martin de Jong, Mirjam Kars and Helen Stout

This in-depth book explains how institutional changes such as the privatization and liberalization of network industries, for example transport, energy or telecommunications, can frequently be disappointing. The expected benefits such as lower prices, innovation and better services fail to materialize, often because the number of competitors is low. The authors demonstrate how strategic actor behaviour of one or more of the firms involved can help explain these disappointing results.

Chapter 11: Counterarrangements

Ernst ten Heuvelhof, Martin de Jong, Mirjam Kars and Helen Stout

Subjects: business and management, organisational behaviour, economics and finance, game theory, institutional economics, public sector economics


INTRODUCTION The case study chapters and their analysis in the previous chapter show that strategic behaviour frequently occurs in infrastructure-based sectors. In many cases, strategic behaviour has serious consequences, not only for the configuration of the market, but also for market parties, end consumers and governments. Market parties can tell immediately by their corporate performance, final consumers are faced with higher prices or a less reliable service provision, and governments find important policy targets being missed. Strategic behaviour pays. This may be the foremost explanation for the ubiquity of strategic behaviour. What this behaviour will lead to and how it will be judged in the longer term is unclear yet, but these strategic winners do not always suffer negative repercussions in the longer term for their strategic behaviour. Memories are short and once the strategic game has been won, it is simply a matter of ‘new round, new chances’. Strategic behaviour pays also because the counterforces tend to be weakly organized. Dixit (1996) has shown that the multiple principal problem leads agents to receive various incentives working at cross-purposes. This problem occurs especially in public sector environments and makes the strength of principal stimuli to agents extremely weak and the attainment of ideal outcomes out of reach. This does not imply that regulatory intervention is totally impossible, but economic theory has had a very hard time bridging the gap with practical organizational behaviour (Laffont and Tirole, 1993). The complexity of administrative context is such that it has thus far been...

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