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A Dynamic Model of the Regulated Firm with a Price Adjustment Mechanism

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  • E.G. Davis

Abstract

Instead of the Averch-Johnson assumptions of instantaneous regulation of the rate of return, but no regulation over the setting of individual rates, this note assumes that the regulator applies the new rates to the test year's output to predict the revenue requirements under the allowed rate of return. A mathematical model of the firm is then worked out. When the A-J view of the regulated firm is dynamized in a rather straightforward fashion, the A-J point no longer has any special significance: it is not the stationary points of the dynamic version of the model. While it is true that the stationary-point does exhibit overcapitalization in the A-J sense, the regulatory agency can use the extent to which it adjusts prices as a further control variable to influence the stationary point.

Suggested Citation

  • E.G. Davis, 1973. "A Dynamic Model of the Regulated Firm with a Price Adjustment Mechanism," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 270-282, Spring.
    • Handle: RePEc:rje:bellje:v:4:y:1973:i:spring:p:270-282
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    Cited by:

    1. Graeme Guthrie, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Journal of Economic Literature, American Economic Association, vol. 44(4), pages 925-972, December.
    2. repec:vuw:vuwscr:18946 is not listed on IDEAS
    3. Guthrie, Graeme, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Working Paper Series 18946, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    4. Mirucki, Jean, 1980. "Vérification des conditions d'efficacité dans la production chez Bell Canada [Checking the conditions of efficient production in Bell Canada]," MPRA Paper 30147, University Library of Munich, Germany, revised Jun 1980.
    5. David P. Baron & Raymond R. De Bondt, 1980. "Factor Price Changes," Discussion Papers 417, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    6. Mirucki, Jean, 1980. "Comportement de l'entreprise réglementée: étude de l'hypothèse Averch-Johnson [Behavior of the Regulated Firm: A Study of the Averch-Johnson Hypothesis]," MPRA Paper 27669, University Library of Munich, Germany, revised 1982.

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