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Strategic Firm Behavior Under Average-Revenue-Lagged Regulation

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  • Kevin Currier

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    Abstract

    Price caps have been shown to have incentive properties superior to traditional rate of return regulation. Average-revenue-lagged regulation (ARL) is attractive in that steady-state prices are known to be efficient. We show that the ARL scheme can be manipulated by the firm so as to yield the unregulated global profit maximum. While tests exist that can provide the regulator with evidence of this strategic behavior, we also demonstrate that the unregulated global profit maximum will not be attainable if Laspeyres (L) regulation is employed. Copyright Springer Science+Business Media, Inc. 2005

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    File URL: http://hdl.handle.net/10.1007/s11149-004-4419-8
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    Bibliographic Info

    Article provided by Springer in its journal Journal of Regulatory Economics.

    Volume (Year): 27 (2005)
    Issue (Month): 1 (September)
    Pages: 67-79

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    Handle: RePEc:kap:regeco:v:27:y:2005:i:1:p:67-79

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    Web page: http://www.springerlink.com/link.asp?id=100298

    Related research

    Keywords: price caps; average-revenue-lagged regulation; laspeyres regulation; strategic behavior;

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    Cited by:
    1. Georg Meran & Christian von Hirschhausen, 2006. "A Modified Yardstick Competition Mechanism," Discussion Papers of DIW Berlin 559, DIW Berlin, German Institute for Economic Research.
    2. Kevin Currier, 2006. "Quality-Adjusted Laspeyres Price Caps: A Graphical Analysis," Atlantic Economic Journal, International Atlantic Economic Society, vol. 34(4), pages 481-490, December.

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