To the extent that price reviews use costs information provided by the firm itself, the firm has incentives to misreport its costs and to manipulate the information provided in such a way that the subsequent price adjustment favors it. In the literature, this is known as 'strategic behavior' or 'gaming'. In practice, there are a number of gaming actions. For instance, firms having private information about costs can either report them truly or make 'creative accounting' shifting cost across periods and categories, e.g. cost padding. 'Creative accounting' allows for information manipulation, but it may involve costs for the firm since it has to manage at least two parallel accounting books (Laffont and Tirole, 1993)
As we have seen, in 'value testing' procedures, the public-sector party makes an effort to collect information on costs directly from markets trading the main inputs. But under certain circumstances, even these procedures are vulnerable to gaming. For instance, when the market is highly concentrated and a simulated model is used as a benchmark, it is likely that the information needed for model calibration is heavily influenced by the costs of the very firm. Thus, the firm could game the public-sector party providing distorted information that leads to price adjustments favorable to it.
This problem is well known in privatized industries under by price cap regulation, where the adjustment of the cap requires information to estimate prospective efficiency gains. Benchmarking in regulated sectors is vulnerable to gaming because these sectors are typically concentrated markets. Thus, since there is a small number of firms reporting information, the probability of each firm's reports influencing the future price caps is high.
Di Tella and Dyck (2002) document a case of gaming in the Chilean electricity sector. The authors observe a U-shaped pattern for the reported costs-to-revenues ratio in the 4-year periods between cap reviews. Reductions in the ratio reached 1.2 % a year, and were reverted in the years prior to regulatory reviews. The authors show that the strongest reported cost reductions occur early in a regulatory period. But, on the basis of stock market information complementing the costs and revenues reported to the regulator, they argue that firms may have shifted the incurred costs towards the end of the regulatory period by engaging in 'creative accounting'. Firms had incentives to do so as long as they expected the high cost level reported at the end of the period to justify a higher price cap in the next review. In other words, firm had a long time to benefit from cost reductions, and revealed cost later in an attempt to influence future price caps, gaming the system.