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Is Protecting Sunk Investments by Consumers a Key Rationale for Natural Monopoly Regulation?

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  • Biggar Darryl

    ()
    (Australian Competition and Consumer Commission and Australian Energy Regulator)

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    Abstract

    Why regulate natural monopolies? Conventional economic theory points to the price-marginal cost margin and the ensuing deadweight loss. But this hypothesis does a poor job of explaining the way that regulators behave in practice. This paper proposes an alternative hypothesis: that natural monopoly regulation exists to protect the sunk investments made by consumers of the regulated firm. This hypothesis explains many of the practices of regulators which make little or no sense under conventional economic theory, such as the desire to pursue stable prices, the aversion to Ramsey pricing, and the role of incremental cost as a pricing floor.

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    Bibliographic Info

    Article provided by De Gruyter in its journal Review of Network Economics.

    Volume (Year): 8 (2009)
    Issue (Month): 2 (June)
    Pages: 1-25

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    Handle: RePEc:bpj:rneart:v:8:y:2009:i:2:n:1

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    Web page: http://www.degruyter.com

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    Web: http://www.degruyter.com/view/j/rne

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    Cited by:
    1. Biggar, Darryl, 2010. "Exit fees and termination fees revisited: funding irrigation infrastructure in a manner compatible with water trade," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 54(4), December.
    2. Hesamzadeh, Mohammad R. & Biggar, Darryl R. & Hosseinzadeh, Nasser, 2011. "The TC-PSI indicator for forecasting the potential for market power in wholesale electricity markets," Energy Policy, Elsevier, vol. 39(10), pages 5988-5998, October.

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