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Setting the X Factor in Price-Cap Regulation Plans

  • Bernstein, Jeffrey I
  • Sappington, David E M

Despite the popularity of price-cap regulation in practice, the economic literature provides limited guidance on how to determine the X factor, which is the rate at which inflation-adjusted output prices must fall under price-cap plans. We review the relevant basic principles, and then determine how to set the X factor: (1) when only a subset of the firm's products are subject to price-cap regulation, and when product-specific costs and productivity cannot be measured; (2) when changes in regulated prices affect the economy-wide inflation rate; and (3) in the presence of such structural changes as strengthened competitive forces. Copyright 1999 by Kluwer Academic Publishers

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Article provided by Springer in its journal Journal of Regulatory Economics.

Volume (Year): 16 (1999)
Issue (Month): 1 (July)
Pages: 5-25

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Handle: RePEc:kap:regeco:v:16:y:1999:i:1:p:5-25
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100298

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  1. Richard Schmalensee, 1989. "Good Regulatory Regimes," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 417-436, Autumn.
  2. Bernstein, Jeffrey I., 1987. "An Examination of the Equilibrium Specification and Structure of Production for Canadian Telecommunications," Working Papers 87-21, C.V. Starr Center for Applied Economics, New York University.
  3. Cabral, Luis M B & Riordan, Michael H, 1989. "Incentives for Cost Reduction under Price Cap Regulation," Journal of Regulatory Economics, Springer, vol. 1(2), pages 93-102, June.
  4. Ellen M. Pint, 1992. "Price-Cap versus Rate-of-Return Regulation in a Stochastic-Cost Model," RAND Journal of Economics, The RAND Corporation, vol. 23(4), pages 564-578, Winter.
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  8. John E. Kwoka, 1993. "Implementing price cops in telecommunications," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 12(4), pages 726-752.
  9. repec:cup:cbooks:9780521426787 is not listed on IDEAS
  10. Diewert, W.E., 1993. "Duality approaches to microeconomic theory," Handbook of Mathematical Economics, in: K. J. Arrow & M.D. Intriligator (ed.), Handbook of Mathematical Economics, edition 4, volume 2, chapter 12, pages 535-599 Elsevier.
  11. Tracy R. Lewis & David E.M. Sappington, 1989. "Regulatory Options and Price-Cap Regulation," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 405-416, Autumn.
  12. Brennan, Timothy J, 1989. "Regulating by Capping Prices," Journal of Regulatory Economics, Springer, vol. 1(2), pages 133-47, June.
  13. Staranczak, Genio A. & Sepulveda, Edgardo R. & Dilworth, Peter A. & Shaikh, Shafi A., 1994. "Industry structure, productivity and international competitiveness: the case of telecommunications," Information Economics and Policy, Elsevier, vol. 6(2), pages 121-142, July.
  14. M.E. Beesley & S.C. Littlechild, 1989. "The Regulation of Privatized Monopolies in the United Kingdom," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 454-472, Autumn.
  15. David Sappington, 1996. "Designing Incentive Regulation for the Telecommunications Industry," Books, American Enterprise Institute, number 52863, 3.
  16. Nadiri, M. Ishaq & Nandi, Banani, 1997. "The changing structure of cost and demand for the U.S. telecommunications industry," Information Economics and Policy, Elsevier, vol. 9(4), pages 319-347, December.
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