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Optimal revenue adjustment in the presence of exogenous demand variation

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  • Sappington, David E.M.

Abstract

This article examines optimal adjustments to a regulated firm’s revenue when realized revenue diverges from expected revenue due to exogenous variation in demand. The adjustments that are considered include those that arise under two popular forms of incentive regulation — price cap regulation (PCR) and revenue cap regulation (RCR). It is shown that the optimal revenue adjustment reflects the firm’s Lerner Index. The optimal policy differs from both PCR and RCR, but more closely resembles PCR (RCR) when the prevailing fixed charge for the firm’s service is large (small).

Suggested Citation

  • Sappington, David E.M., 2024. "Optimal revenue adjustment in the presence of exogenous demand variation," Energy Economics, Elsevier, vol. 131(C).
    • Handle: RePEc:eee:eneeco:v:131:y:2024:i:c:s0140988324001154
    DOI: 10.1016/j.eneco.2024.107407
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    More about this item

    Keywords

    regulatory policy; Ex post revenue adjustment; Demand uncertainty;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L97 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Utilities: General

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