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The timing of monopoly investment under cost-based and price-based regulation

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  • Borrmann, Jörg
  • Brunekreeft, Gert

Abstract

This article contributes a theoretical analysis of the effects of different types of regulation on the timing of monopoly investment in a setting with lumpy capital investment outlays. Concentrating on the case where investment increases the regulatory asset base, we distinguish between price-based regulation and cost-based regulation. Under cost-based regulation, investment triggers a change of regulated prices, whereas, under price-based regulation, investment does not affect prices at all. Focusing on replacement investment due to wear and tear and expansion investment due to demand growth, our main conclusion is that cost-based regulation accelerates investment compared to price-based regulation.

Suggested Citation

  • Borrmann, Jörg & Brunekreeft, Gert, 2020. "The timing of monopoly investment under cost-based and price-based regulation," Utilities Policy, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:juipol:v:66:y:2020:i:c:s0957178720300965
    DOI: 10.1016/j.jup.2020.101102
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    More about this item

    Keywords

    Cost-based regulation; Expansion investment; Investment timing; Monopoly; Price-based regulation; Replacement investment;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • G00 - Financial Economics - - General - - - General
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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