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Bigger and Better: A Dynamic Regulatory Mechanism for Optimum Quality

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Author Info

  • De Fraja, Gianni
  • Iozzi, Alberto

Abstract

Vogelsang and Finsinger’s seminal paper (Bell Journal of Economics, 1979) proposes a mechanism for price regulation with some desirable properties, such as convergence to a second best optimum. This mechanism applies to situations where quality is fixed: in practice, quality can be varied by the firm, and regulators have typically imposed constraints on the firm’s quality choice. This Paper lays a rigorous theoretical foundation to the inclusion of quality measures in the constraints faced by a regulated firm. We identify a potential pitfall in the approach taken in practice by regulators, and show that, in order to avoid it, the regulated firm should be subject to an additional constraint, which, loosely speaking, requires firms’ choices not to be too erratic.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4502.

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Date of creation: Aug 2004
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Handle: RePEc:cpr:ceprdp:4502

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Related research

Keywords: price cap; quality; regulation; RPI-X;

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Citations

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Cited by:
  1. Stéphane Auray & Thomas Mariotti & Fabien Moizeau, 2006. "Dynamic Regulation of Public Good Quality," Cahiers de recherche 0610, CIRPEE.
  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. Angela S. Bergantino & Etienne Billette de Villemeur & Annalisa Vinella, 2006. "A Model of Partial Regulation in the Maritime Ferry Industry," series 0010, Dipartimento di Scienze Economiche e Metodi Matematici - Università di Bari, revised Jan 2006.
  4. Gui, Benedetto & de Villemeur, Étienne, 2007. "Regulation of a Monopoly Generating Externalities," IDEI Working Papers 469, Institut d'Économie Industrielle (IDEI), Toulouse, revised Jan 2011.
  5. 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.
  6. Stéphane Auray & Thomas Mariotti & Fabien Moizeau, 2011. "Dynamic regulation of quality," Working Papers 245736, Institut National de la Recherche Agronomique, France.
  7. Luigi Benfratello & Alberto Iozzi & Paola Valbonesi, 2005. "Privatisation, regulation and productivity in the Italian motorway industry," "Marco Fanno" Working Papers 0002, Dipartimento di Scienze Economiche "Marco Fanno".
  8. David Sappington, 2005. "Regulating Service Quality: A Survey," Journal of Regulatory Economics, Springer, vol. 27(2), pages 123-154, November.

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