Optimal price-cap reviews
This paper demonstrates, in a dynamic model of monopoly regulation with price-cap, that a periodic price review may increase productive efficiency. When the firm's choice of cost-reducing effort depends on the volume of output supplied, a periodic revision allows the regulator to set more binding prices, thus inducing the monopolist to exert more cost-reducing effort in the future. In a continuous-time setting we establish the conditions under which, within a given concession period, a single full rate base review improves cost-efficiency, and by this route, we also establish the optimal number of reviews. This number depends on the length of the concession period in relation to the slope of the demand function and the intensity of the disutility of effort. Our results add both a theoretical argument in favour of the practice of periodic reviews in price-cap regulation and provide regulators with a basis for the calculation of the optimal regulatory lag. Potentially, our argument is relevant to every regulated monopolist, including the utilities' networks. A particular case worth mentioning is the regulation of toll-road tariffs, particularly in the case of a newly privatized toll-road concessionaire.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
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.:
- Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743.
- Laffont, Jean-Jacques & Tirole, Jean, 1986.
"Using Cost Observation to Regulate Firms,"
Journal of Political Economy,
University of Chicago Press, vol. 94(3), pages 614-641, June.
- Coco, Giuseppe & De Vincenti, Claudio, 2004. "Can price regulation increase cost-efficiency?," Research in Economics, Elsevier, vol. 58(4), pages 303-317, December.
- J. Luis Guasch & Stéphane Straub, 2006. "Renegotiation Of Infrastructure Concessions: An Overview," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 77(4), pages 479-493, December.
- Chiara D'Alpaos & Cesare Dosi & Michele Moretto, 2005.
"Concession lenght and investment timing flexibility,"
ubs0502, University of Brescia, Department of Economics.
- Michele Moretto & Chiara D.Alpaos & Cesare Dosi, 2005. "Concession Length and Investment Timing Flexibility," Working Papers 2005.32, Fondazione Eni Enrico Mattei.
- Tracy R. Lewis & Huseyin Yildirim, 2002. "Learning by Doing and Dynamic Regulation," RAND Journal of Economics, The RAND Corporation, vol. 33(1), pages 22-36, Spring.
- Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
- Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716.
When requesting a correction, please mention this item's handle: RePEc:eee:juipol:v:16:y:2008:i:4:p:238-244. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.