The pricing dynamics of utilities with underdeveloped networks
AbstractThis paper uses an analytically tractable intertemporal framework for analyzing the dynamic pricing of a utility with an underdeveloped network (a typical case in most developing countries) facing a competitive fringe, short-run network adjustment costs, theft of service, and the threat of a retaliatory regulatory review that is increasing with the price it charges. This simple dynamic optimization model yields a number of powerful policy insights and conclusions. Under a variety of plausible assumptions (in the context of developing countries) the utility will find its long-run profits enhanced if it exercises restraint in the early stages of network development by holding price below the limit defined by the unit costs of the fringe. The utility's optimal price gradually converges toward the limit price as its network expands. Moreover, when the utility is threatened with retaliatory regulatory intervention, it will generally have incentives to restrain its pricing behavior. These findings have important implications for the design of post-privatization regulatory governance in developing countries.
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 4198.
Date of creation: 01 Apr 2007
Date of revision:
Economic Theory&Research; Markets and Market Access; Urban Water Supply and Sanitation; Infrastructure Regulation; Access to Markets;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-04-21 (All new papers)
- NEP-DEV-2007-04-21 (Development)
- NEP-ENE-2007-04-21 (Energy Economics)
- NEP-MIC-2007-04-21 (Microeconomics)
- NEP-NET-2007-04-21 (Network Economics)
- NEP-REG-2007-04-21 (Regulation)
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.:
- Ulrich Blum & Christian Growitsch & Niels Krap, 2006. "Network Investment and the Threat of Regulation – Preventing Monopoly Exploitation or Infrastructure Construction?," IWH Discussion Papers 7, Halle Institute for Economic Research.
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