The Quest for Quality: A Quality Adjusted Dynamic Regulatory Mechanism
Abstract"In situations where quality is fixed, the widely used RPI-X regulatory mechanism has a number of desirable properties, such as convergence to a second best optimum. Theoretical analysis of this mechanism in the case of endogenous quality is limited and therefore regulators have typically imposed constraints on the firm's quality choice in "ad hoc" manners, either by mandating quality levels, or by including quality adjustment factors in the RPI-X mechanism. In this paper, we construct the rigorous theoretical counterpart of these manners of including quality measures in the constraints faced by a regulated firm. This mechanism converges to second best optimum. It works by offering the firm trade-offs between prices and qualities based on the choice it made in the previous period; however, reflecting the practical problem valuing quality, the informational requirement to select these trade-offs appropriately is qualitatively stronger than in the fixed quality case. Moreover, even when the informational problem can be overcome, we identify a further potential pitfall in the approach taken in practice by regulators, and show that, in order to avoid it, the regulated firm should be subject to an additional constraint, which we label the distance constraint, and which can be interpreted as requiring the firms to choose prices and qualities within a band in every period." Copyright (c) 2008, The Author(s) Journal Compilation (c) 2008 Wiley Periodicals, Inc..
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.
Volume (Year): 17 (2008)
Issue (Month): 4 (December)
Contact details of provider:
Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- De Fraja, Gianni & Michetti, Emanuela & Zanchettin, Piercarlo, 2008.
"Toc 'n' Roll: Bargaining, Service Quality and Specificity in the UK Railway Network,"
CEPR Discussion Papers
7088, C.E.P.R. Discussion Papers.
- Gianni De Fraja & Emanuela Michetti & Piercarlo Zanchettin, 2011. "Toc 'n' Roll: Bargaining, Service Quality and Specificity in the UK Railway Network," Journal of Transport Economics and Policy, London School of Economics and University of Bath, vol. 45(3), pages 383-414, September.
- Gianni De Fraja & Emanuela Michetti & Piercarlo Zanchettin, 2009. "Toc ’n’ Roll: Bargaining, Service Quality and Specificity in the UK Railway Network," Discussion Papers in Economics 09/7, Department of Economics, University of Leicester.
- David Sappington & Dennis Weisman, 2010. "Price cap regulation: what have we learned from 25 years of experience in the telecommunications industry?," Journal of Regulatory Economics, Springer, vol. 38(3), pages 227-257, December.
- Saha, Souresh, 2014. "Firm's objective function and product and process R&D," Economic Modelling, Elsevier, vol. 36(C), pages 484-494.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).
If references are entirely missing, you can add them using this form.