Researching enterprise behavior on Russian markets with imperfect competition (Case study: public utilities and residential services)
One of the main motivations of this work is the obvious failure of the standard Walras theory for studying the regulation of competition and the liberalization of modern markets in transition economies, market design and conditions for efficient market functioning. In the course of the project, we classified approaches to the analysis of modern markets and described sources of inefficiency in the state’s impact on the economy. We focused on creating a new analysis paradigm involving a strategic approach to market analysis, an exchange model for both perfect and imperfect information, and the role of the institution of intermediary. We developed a methodology for the analysis of decentralized markets based on the study of strategic interaction among players.
The work contains relevant examples of the application of analytical tools and case studies. We analysed the main sector-specific characteristics of the utilities market and evaluated similarities between externalities common to different utilities markets and the use of mechanisms for minimizing negative consequences of external influence. By establishing an appealing investment climate in utilities, government agencies play a key role in the investment process in the sector. This requires a series of prerequisites ensuring the stability and clarity of the rules of the game: consistent and coherent regulation, mature and comprehensive legal groundwork, macroeconomic equilibrium, and a high investment appeal of the economy in general. The Russia utilities sector faces a challenge that is typical of large-scale investments in an environment of incomplete reforms. Among other difficulties, we note the insufficiently effective institutional system, the large non-market sector and the possible unpredictability of the regulator’s actions. As part of the project, we made several conclusions on additional ways of developing the efficiency of the utilities markets that could mitigate the negative impact of externalities. They take account of the experience of other utilities markets that have already developed mechanisms for managing the repercussions of these externalities.
We developed a theoretical model of interaction among the main players in the utilities sector for promoting the development of the system of public utilities and residential services. Using this model, we analysed the possibility of reaching Pareto efficiency when organising the development of public utilities infrastructure in a laboratory environment as well as in the environment of existing Russian legislation and institutions. The study’s results show that achieving Pareto improvement is possible only if one shifts to hook-up rate regulation, which would set a new level of Pareto efficiency. It is also necessary to finance the investment program through hook-up fees. In Russia, the interest of municipal government is critical for developing reforms in the area of public utilities and residential services. If municipal governments do not show explicit interest as market regulators in developing the utilities infrastructure, then systems of public utilities and residential services degrade, and housing construction rates slow down.
The key factor determining the efficiency of introducing hook-up rates is the possibility for the utilities and residential services sector to benefit from economies of scale as housing-community infrastructure systems develop. The absence of economies of scale prevents any progress towards achieving Pareto.