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Setting the X Factor in Price Cap Regulation Plans

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Author Info
Jeffrey I. Bernstein
David E. M. Sappington

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Abstract

Despite the popularity of price cap regulation in practice, the economic literature provides relatively little guidance on how to determine the X factor, which is the rate at which inflation -adjusted output prices must fall under price cap plans. We review the standard principles that inform the choice of the X factor, and then consider important extensions. We analyze appropriate modifications of the X factor: (1) when only a subset of the firm's products are subject to price cap regulation, and when product-specific costs and productivity cannot be measured; (2) when the pricing decisions of the regulated firm affect the economy-wide inflation rate; and (3) in the presence of structural changes in the industry, such as a strengthening of competitive forces.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6622.

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Date of creation: Jun 1998
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Handle: RePEc:nbr:nberwo:6622

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Find related papers by JEL classification:
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
D24 - Microeconomics - - Production and Organizations - - - Production; Capital and Total Factor Productivity; Capacity

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Diewert, W.E., 1993. "Index Number Issues in Incentive Regulation," UBC Departmental Archives 93-06, UBC Department of Economics.
  2. Tracy R. Lewis & David E.M. Sappington, 1989. "Regulatory Options and Price-Cap Regulation," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 405-416, Autumn. [Downloadable!] (restricted)
  3. M.E. Beesley & S.C. Littlechild, 1989. "The Regulation of Privatized Monopolies in the United Kingdom," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 454-472, Autumn. [Downloadable!] (restricted)
  4. Diewert, W.E., 1993. "Duality approaches to microeconomic theory," Handbook of Mathematical Economics, in: K. J. Arrow & M.D. Intriligator (ed.), Handbook of Mathematical Economics, edition 4, volume 2, chapter 12, pages 535-599 Elsevier. [Downloadable!] (restricted)
  5. Richard Schmalensee, 1989. "Good Regulatory Regimes," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 417-436, Autumn. [Downloadable!] (restricted)
  6. Andrei Shleifer, 1985. "A Theory of Yardstick Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 319-327, Autumn. [Downloadable!] (restricted)
  7. Brennan, Timothy J, 1989. "Regulating by Capping Prices," Journal of Regulatory Economics, Springer, vol. 1(2), pages 133-47, June.
  8. Joel Sobel, 1997. "A Re-examination of Yardstick Competition," University of California at San Diego, Economics Working Paper Series 97-25, Department of Economics, UC San Diego. [Downloadable!]
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  9. Dag Morten Dalen, 1998. "Yardstick Competition and Investment Incentives," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 7(1), pages 105-126, 03. [Downloadable!] (restricted)
  10. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790.
  11. Cabral, Luis M B & Riordan, Michael H, 1989. "Incentives for Cost Reduction under Price Cap Regulation," Journal of Regulatory Economics, Springer, vol. 1(2), pages 93-102, June.
  12. Staranczak, Genio A. & Sepulveda, Edgardo R. & Dilworth, Peter A. & Shaikh, Shafi A., 1994. "Industry structure, productivity and international competitiveness: the case of telecommunications," Information Economics and Policy, Elsevier, vol. 6(2), pages 121-142, July. [Downloadable!] (restricted)
  13. Bernstein, Jeffrey I, 1989. "An Examination of the Equilibrium Specification and Structure of Production for Canadian Telecommunications," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(3), pages 265-82, July-Sept. [Downloadable!] (restricted)
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  14. Ellen M. Pint, 1992. "Price-Cap versus Rate-of-Return Regulation in a Stochastic-Cost Model," RAND Journal of Economics, The RAND Corporation, vol. 23(4), pages 564-578, Winter. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Noel Uri, 2002. "Assessing the Effect of Incentive Regulation on Productive Efficiency in Telecommunications in the United States," European Journal of Law and Economics, Springer, vol. 13(2), pages 113-127, March. [Downloadable!] (restricted)
  2. Paul L Joskow, 2005. "Incentive Regulation In Theory And Practice - Electricity Distribution And Transmission Networks," Working Papers 0514, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research. [Downloadable!]
    Other versions:
  3. Kirkpatrick, Colin & Parker, David & Zhang, Yin-Fang, 2004. "Price and Profit Regulation in Developing and Transition Economies, Methods Used and Problems Faced: A Survey of the Regulators," Centre on Regulation and Competition (CRC) Working papers 30596, University of Manchester, Institute for Development Policy and Management (IDPM). [Downloadable!]
  4. Timothy J. Tardiff & William E. Taylor, 2003. "Aligning Price Regulation with Telecommunications Competition," Review of Network Economics, Concept Economics, vol. 2(4), pages 338-354, December. [Downloadable!]
  5. Vladimir Hlasny, 2008. "The impact of restructuring and deregulation on gas rates," Journal of Regulatory Economics, Springer, vol. 34(1), pages 27-52, August. [Downloadable!] (restricted)
  6. Gianni De Fraja & Alberto Iozzi, . "Short Term and Long Term Effects of Price Cap Regulation," Discussion Papers 00/61, Department of Economics, University of York. [Downloadable!]
  7. David E. M. Sappington, 2003. "The Effects of Incentive Regulation on Retail Telephone Service Quality in the United States," Review of Network Economics, Concept Economics, vol. 2(4), pages 355-375, December. [Downloadable!]
  8. Noel D. Uri, 2001. "Technical Efficiency, Allocative Efficiency, and the Implementation of a Price Cap Plan in Telecommunications in the United States," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 163-186, May. [Downloadable!]
  9. Hawdon, David & Hunt, Lester & Levine, Paul L & Rickman, Neil, 2005. "Optimal Sliding Scale Regulation: An Application to Regional Electricity Distribution in England and Wales," CEPR Discussion Papers 4934, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  10. Mark Armstrong & David Sappington, 2005. "Regulation, Competition and Liberalization," Industrial Organization 0505011, EconWPA, revised 07 Oct 2005. [Downloadable!]
    Other versions:
  11. Noel Uri, 2001. "Productivity Change, Technical Progress, and Efficiency Improvement in Telecommunications," Review of Industrial Organization, Springer, vol. 18(3), pages 283-300, May. [Downloadable!] (restricted)
  12. Noel Uri, 2003. "Service Quality Effects of Incentive Regulation on Access Service in Telecommunications in the United States," European Journal of Law and Economics, Springer, vol. 16(3), pages 369-390, November. [Downloadable!] (restricted)
  13. Jeffrey Bernstein & Juan Hernandez & Jose Rodriguez & Agustin Ros, 2006. "X-Factor updating and total factor productivity growth: the case of peruvian telecommunications, 1996–2003," Journal of Regulatory Economics, Springer, vol. 30(3), pages 316-342, November. [Downloadable!] (restricted)
    Other versions:
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