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Cost‐Padding in Profit‐Regulated Firms

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  • ROBERT P. ALBON
  • MICHAEL G. KIRBY

Abstract

When entry into an industry is restricted, economic regulation of that industry is often directed at preventing existing firms from monopoly pricing behaviour. One form of such regulation is to set prices so as to control the level of profits earned by these firms. This paper briefly reviews the relevant economic literature and presents a model of the regulated firm in which such price‐setting procedures provide an incentive to inflate costs above minimum levels. The welfare cost of this form of regulation can then exceed that occurring at the unconstrained monopoly outcome. The setting of air fares under the Two‐Airline Policy and the regulation of natural gas in NSW are discussed in the context of this analysis.

Suggested Citation

  • Robert P. Albon & Michael G. Kirby, 1983. "Cost‐Padding in Profit‐Regulated Firms," The Economic Record, The Economic Society of Australia, vol. 59(1), pages 16-27, March.
    • Handle: RePEc:bla:ecorec:v:59:y:1983:i:1:p:16-27
    DOI: 10.1111/j.1475-4932.1983.tb00577.x
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    References listed on IDEAS

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    1. Davies, David G, 1971. "The Efficiency of Public versus Private Firms, The Case of Australia's Two Airlines," Journal of Law and Economics, University of Chicago Press, vol. 14(1), pages 149-165, April.
    2. Kirby, Michael G, 1982. "A Critical Examination of the Domestic Air Transport Policy Review," Australian Economic Papers, Wiley Blackwell, vol. 21(39), pages 309-320, December.
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    Cited by:

    1. Don Anderson & Frank Finn, 1994. "Regulation and Deregulation of the Supply of Bulk Liquid Petroleum Gas in Queensland: A Case Study," The Economic Record, The Economic Society of Australia, vol. 70(210), pages 253-261, September.

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