Yardstick Competition Illustration: A giant ruler measuring skyscrapers, symbolizing fair market prices for consumers.

Is Your Business Playing Fair? How 'Yardstick Competition' Can Level the Playing Field

Beau Callahan in Business & Economy June 2025 • 4 min read.

"Oligopolies beware! A new approach to regulation uses comparison to foster fairer pricing and a better deal for consumers."

Imagine a market dominated by just a few companies—an oligopoly. These giants often have inside information about their costs, making it difficult for regulators to ensure fair pricing. Traditional methods of regulation can fall short, but what if there was a way to encourage competition and transparency without needing to know every detail of each company's operations?

That's where 'yardstick competition' comes in. This innovative approach, explored in depth by economists Kai Hao Yang and Alexander K. Zentefis, offers a promising solution. It focuses on comparing firms against each other, incentivizing them to improve efficiency and offer better prices to consumers.

This article breaks down the complexities of regulating oligopolies and explains how yardstick competition can lead to a more level playing field. We'll explore how it works, its potential benefits, and why it might be the key to a fairer marketplace.

What is Yardstick Competition and How Does It Work?

Yardstick Competition Illustration: A giant ruler measuring skyscrapers, symbolizing fair market prices for consumers.

Yardstick competition is a regulatory strategy where firms are compared against each other to incentivize better performance. Instead of relying on detailed information about a company's internal costs (which can be hard to obtain and verify), regulators look at the prices and services offered by similar firms in the market.

The core idea is that by creating a system of relative performance evaluation, companies are motivated to become more efficient and offer competitive prices. Think of it as a race where the finish line is determined by the performance of other runners—you're constantly pushing yourself to stay ahead.

Here's how yardstick competition works in practice:

Price Caps: Regulators set price limits based on the average prices of other firms in the industry. This prevents any single firm from charging excessively high prices.
Lump-Sum Transfers: Governments use taxes and subsidies to ensure companies are encouraged to meet set targets.
Performance Benchmarks: The regulator can ensure targets are met to increase overall consumer satisfaction.

The key advantage of yardstick competition is that it reduces the need for regulators to have perfect information about each firm's costs. By focusing on relative performance, it encourages companies to improve their operations and offer better value to consumers, regardless of their specific circumstances.

The Future of Fair Competition

Yardstick competition offers a promising path toward fairer and more efficient markets. By focusing on comparison and incentivizing better performance, it can help regulators level the playing field and ensure that consumers get the best possible value. As markets become increasingly complex, innovative regulatory approaches like yardstick competition will be essential for promoting a healthy and competitive economy.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: 10.1016/j.jet.2023.105709,

Title: Regulating Oligopolistic Competition

Subject: econ.th

Authors: Kai Hao Yang, Alexander K. Zentefis

Published: 06-02-2023

Everything You Need To Know

What is yardstick competition, and how does it differ from traditional regulation?

Yardstick competition is a regulatory strategy where firms, especially in an oligopoly, are compared against each other to foster better performance. Unlike traditional regulation that may require in-depth knowledge of each company's internal costs, yardstick competition focuses on the prices and services offered by similar firms. Regulators use this relative performance evaluation to encourage companies to become more efficient and offer competitive prices. This is implemented through price caps, lump-sum transfers (taxes and subsidies), and performance benchmarks. The key advantage is that it reduces the need for regulators to have perfect information about each firm's costs, promoting a fairer market.

How does yardstick competition work in practice, and what are the specific mechanisms used by regulators?

In practice, yardstick competition employs several mechanisms. Firstly, regulators set price limits, or "Price Caps," based on the average prices of other firms within the industry. This prevents any single firm from charging excessively high prices. Secondly, "Lump-Sum Transfers," involve governments using taxes and subsidies to encourage companies to meet specific targets. Finally, "Performance Benchmarks" are set to ensure that companies meet targets and increase consumer satisfaction. These mechanisms work together to create a competitive environment where firms strive to outperform each other.

What are the benefits of using yardstick competition in markets dominated by an oligopoly?

Yardstick competition offers several benefits, particularly in markets controlled by an oligopoly. It promotes fairer pricing and a better deal for consumers by incentivizing firms to improve efficiency and offer competitive prices. By comparing firms, it creates a system of relative performance evaluation, motivating companies to reduce costs and improve their services. This also reduces the burden on regulators as they don't need to have full insight into each firm's internal costs, making the regulatory process more efficient and transparent. The focus on relative performance encourages companies to offer better value regardless of their specific circumstances, fostering a more level playing field.

How can price caps and lump-sum transfers be used within the framework of yardstick competition?

Price caps are a crucial part of yardstick competition, where regulators set price limits based on the average prices of other firms in the industry. This is a direct mechanism to prevent any firm from charging excessively high prices. Additionally, lump-sum transfers are employed, which involve governments using taxes and subsidies. These transfers are designed to encourage companies to meet set targets. For instance, a firm that prices below the average may be rewarded, while one that prices above may face penalties. Together, they create a balance, ensuring that firms are incentivized to offer competitive prices while still maintaining profitability.

Why is yardstick competition considered an innovative approach to regulation, and what are its implications for the future of fair competition?

Yardstick competition is innovative because it departs from traditional regulation by focusing on comparing firms against each other, rather than requiring detailed knowledge of each company's internal costs. This approach encourages competition and transparency without the need for regulators to know every operational detail of each firm. It offers a promising path toward fairer and more efficient markets. In the future, as markets become more complex, innovative regulatory approaches like yardstick competition will be essential for promoting a healthy and competitive economy. It ensures that consumers get the best possible value and helps regulators level the playing field.