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Quality-Adjusted Laspeyres Price Caps: A Graphical Analysis

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  • Kevin Currier

Abstract

The strong incentive to reduce costs under price cap regulation may create incentives for a regulated firm to reduce delivered service quality levels. Corrective measures, such as service quality standards or a service quality adjustment factor in the price cap formula may mitigate against this tendency. In this paper, we explore the properties of a regulatory scheme in which a Laspeyres index of prices and qualities is employed by the regulator. Copyright International Atlantic Economic Society 2006

Suggested Citation

  • Kevin Currier, 2006. "Quality-Adjusted Laspeyres Price Caps: A Graphical Analysis," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 34(4), pages 481-490, December.
    • Handle: RePEc:kap:atlecj:v:34:y:2006:i:4:p:481-490
    DOI: 10.1007/s11293-006-9041-y
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    References listed on IDEAS

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    1. Weisman, Dennis L., 2005. "Price regulation and quality," Information Economics and Policy, Elsevier, vol. 17(2), pages 165-174, March.
    2. Gianni De Fraja & Alberto Iozzi, 2008. "The Quest for Quality: A Quality Adjusted Dynamic Regulatory Mechanism," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(4), pages 1011-1040, December.
    3. David E.M. Sappington & David S. Sibley, 1992. "Strategic Nonlinear Pricing under Price-Cap Regulation," RAND Journal of Economics, The RAND Corporation, vol. 23(1), pages 1-19, Spring.
    4. Kevin Currier, 2005. "Strategic Firm Behavior Under Average-Revenue-Lagged Regulation," Journal of Regulatory Economics, Springer, vol. 27(1), pages 67-79, September.
    5. Vasington Paul B., 2003. "Incentive Regulation in Practice: A Massachusetts Case Study," Review of Network Economics, De Gruyter, vol. 2(4), pages 1-15, December.
    6. Brennan, Timothy J, 1989. "Regulating by Capping Prices," Journal of Regulatory Economics, Springer, vol. 1(2), pages 133-147, June.
    7. Sheshinski, Eytan, 1976. "Price, Quality and Quantity Regulation in Monopoly Situations," Economica, London School of Economics and Political Science, vol. 43(17), pages 127-137, May.
    8. Kevin Currier, 2004. "Natural monopoly regulation in the presence of cost misreporting," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 32(1), pages 49-61, March.
    9. Ingo Vogelsang & Jorg Finsinger, 1979. "A Regulatory Adjustment Process for Optimal Pricing by Multiproduct Monopoly Firms," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 157-171, Spring.
    10. Vogelsang, Ingo, 2002. "Incentive Regulation and Competition in Public Utility Markets: A 20-Year Perspective," Journal of Regulatory Economics, Springer, vol. 22(1), pages 5-27, July.
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    More about this item

    Keywords

    monopoly regulation; Laspeyres price caps; service quality; L43;
    All these keywords.

    JEL classification:

    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation

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