MSc in Economic regulation and competition
Quantitative techniques for Regulation in Practice
(Instructor: J Cubbin)
Place and time:
Quantitative Techniques for Regulation in Practice (lecture) CM568
Quantitative Techniques for Regulation in Practice (lab) A416
Contact details: j.s.cubbin@city.ac.uk. Tel 020 7040 8533. Fax 020 7040 8580 (dept.)
Web site: http://www.staff.city.ac.uk/j.s.cubbin
Aims and objectives
Quantification is essential in setting regulated prices. It is also becoming more important in
the conduct of competition policy.
In this course we look at a number of commonly-used techniques with a view to be able to
operate them ourselves, and perhaps more fundamentally, understanding their strengths and
weaknesses. There is a danger that techniques will be treated as magic black boxes which
guarantee objective, truthful results. Equally there is the danger that if the limitations are not
understood from the outset, a growing awareness of their limitations will be treated as
completely “discrediting” the techniques.
The main aim is to make you comfortable with the use of quantitative techniques in
regulation and issues. This involves three elements:
 practice in using techniques
 understanding the limitations of the techniques
 practice in applying results of techniques to regulatory situations.
By the end of the module, you should also be able critically to evaluate quantitative work
carried out by others.
Course content
1. Review of regression analysis
Violations of the classical assumptions: consequences and tests.
Some econometrics of time series: spurious correlation, co-integration, error correction
models.
Panel data concepts and approaches.
2. The cost of capital
CAPM and its extensions
The risk premium arithmetic and geometric means
Estimating Beta from market data.
Criticisms of CAPM
Other models: DGM, APT
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3. Efficiency assessment
Introduction
Regression analysis
Identifying cost drivers
Use of single-year cross sections.
Examples
Data envelopment analysis (DEA)
Basic idea
Assumptions
Effects of omitted and unnecessary variables.
DEA with panels
Reliability of DEA, and comparison with RA – simulation results
Stochastic frontiers: concept and examples
Efficiency changes over time
4. Quantitative techniques for competition policy analysis
Market definition and the effects of mergers:
Price correlations, econometric oligopoly models.
Market share data
Residual demand analysis
Merger simulation
Teaching and learning methods
Lectures (2 hours weekly) and lab sessions (1 hour weekly) are combined with exercises for
you to do in your own time. Practice is essential, and you will be guided through this during
the lab sessions. You will not learn anything if you do not attempt the exercises.
There will be one or more role play sessions where we can practise using the results of a
quantitative analysis in an adversarial setting. One or more of the timetabled sessions may
be replaced by a reading and discussion session.
Assessment
There will be one unseen 3 hour written examination and one coursework assessment to be
handed in by (date to be announced). The assignment will be set at least one month in
advance. Do not leave this till the last minute – remember you will have exams to prepare
for.
Reading
The texts from last term will continue to be useful. Some students will also find the
following to be of help with the econometric concepts.
[1a] Mark Reiman and R. Carter Hill. Using EViews for “Undergraduate Econometrics”.
(Undergraduate Econometrics is the name of another book by Carter Hill Griffiths and Judge)
John Wiley and Sons, 2001. £22.95). This book contains a student version of the EViews
software which we shall be using for the labs. A slightly different version from what is
installed on the University servers, but you need to be able to handle minor software
differences.)
[1b] In a similar vein, students who purchase William Greene's Econometric Analysis 5th
edition get access to a stripped-down version of Limdep econometric software. I find
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Limdep particularly useful for efficiency and panel data analysis, and will try to introduce its
use later in the term. Greene's text contains much more stuff than we can cover in a term but
it is a handy reference for your future use.
[2] C. Dougherty Introduction to Econometrics Oxford University Press (2002 ).
For the efficiency analysis section there is:
[3] Coelli T, Prasada Rao DS, and Battese GE An Introduction to Efficiency and
Productivity Analysis Kluwer (1998).
and
[4] Coelli, T, Estache, A, Perelman, S, and Trujillo, L. A primer on Efficiency measurement
for Utilities and Transport Regulators. World Bank Institute, 2003 ISBN 0-8213-5379-9
In addition there will be a number of policy and topical documents will be provided
containing examples of applications of the techniques studied here.
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