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Dynamics of Price Regulation

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  • Gary Biglaiser
  • Michael Riordan

Abstract

We study the dynamics of price regulation for an industry adjusting to exogenous technological progress. First, we characterize the optimal capacity path and replacement cycles in a neoclassical investment model. Second, we show that naive rate-of-return regulation, which ignores components of economic depreciation, eventually results in a deficient level of capacity due to excessively high retail prices burdened by the need to recover the underdepreciated costs of historical investments. Third, we explain how price-cap regulation leads to more efficient capital replacement decisions compared to naive rate-of-return regulation, and we show how finite price-cap horizons distort capital replacement decisions compared to optimal regulation. Finally, we interpret recent regulatory reforms in telecommunications markets.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 31 (2000)
Issue (Month): 4 (Winter)
Pages: 744-767

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Handle: RePEc:rje:randje:v:31:y:2000:i:winter:p:744-767

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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. Ingo Vogelsang, 2006. "Electricity Transmission Pricing and Performance-based Regulation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 97-126.
  3. Marija Bartl, 2010. "The Affordability of Energy: How Much Protection for the Vulnerable Consumers?," Journal of Consumer Policy, Springer, vol. 33(3), pages 225-245, September.
  4. Ariel Casarin, 2014. "Productivity throughout regulatory cycles in gas utilities," Journal of Regulatory Economics, Springer, vol. 45(2), pages 115-137, April.
  5. David E. M Sappington, 2005. "On the Irrelevance of Input Prices for Make-or-Buy Decisions," American Economic Review, American Economic Association, vol. 95(5), pages 1631-1638, December.

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