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Price Caps and Output Floors: A Comparison of Simple Regulatory Rules

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  • De Fraja, Gianni
  • Iossa, Elisabetta

Abstract

The authors study in this paper a simple alternative to price cap regulation. The mechanism, which they label 'output floor' regulation, requires the regulated firm to supply a given level of output. This rule is as simple as price cap regulation, and performs identically when the regulated firm is a natural monopoly; however, the authors show that, in the presence of a competitive fringe, output floor regulation yields lower prices and stronger incentives for cost reduction. Its introduction, however, is likely to be resisted by the industry, since it lowers managerial utility and shareholders' profits.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 108 (1998)
Issue (Month): 450 (September)
Pages: 1404-21

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Handle: RePEc:ecj:econjl:v:108:y:1998:i:450:p:1404-21

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Cited by:
  1. Matsumura, Toshihiro & Okumura, Yasunori, 2013. "Privatization neutrality theorem revisited," Economics Letters, Elsevier, vol. 118(2), pages 324-326.
  2. Angela S. Bergantino & Etienne Billette De Villemeur & Annalisa Vinella, 2011. "Partial Regulation in Vertically Differentiated Industries," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 13(2), pages 255-287, 04.
  3. Cameron Hepburn, 2006. "Regulation by Prices, Quantities, or Both: A Review of Instrument Choice," Oxford Review of Economic Policy, Oxford University Press, vol. 22(2), pages 226-247, Summer.

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