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Pricing Decisions of Regulated Firms: A Behavioral Approach

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  • Paul L. Joskow

Abstract

Once the prices for utility service are set by state regulatory authorities, they remain at fixed levels until they are officially increased or decreased by the regulatory agency. A utility company is not free to vary the prices of its service independently. This paper presents the results of an attempt to specify and estimate a behavioral model of the pricing decisions of regulated firms. The "threshold" behavior of regulated firms with regard to their decisions to seek general price increases from state regulatory authorities and their decisions to file "voluntary" price decreases is discussed, and two decision equations are specified and then estimated for regulated electric utilities in New York State. The decision to file for a price increase is shown to depend on the growth rate of earnings per share achieved by the firm in the current and previous year, on the level of interest coverage realized in the current year, and on a variable which measures prior expectations of success in the hearing room. The decision to file a voluntary price decrease is shown to depend on the growth rate in earnings per share and a variable which measures the expectations of "forced" regulation.

Suggested Citation

  • Paul L. Joskow, 1973. "Pricing Decisions of Regulated Firms: A Behavioral Approach," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 118-140, Spring.
  • Handle: RePEc:rje:bellje:v:4:y:1973:i:spring:p:118-140
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    References listed on IDEAS

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    1. Baron, David P, 1970. "Price Uncertainty, Utility, and Industry Equilibrium in Pure Competition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 11(3), pages 463-480, October.
    2. Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March.
    3. Steinar Ekern & Robert Wilson, 1974. "On the Theory of the Firm in an Economy with Incomplete Markets," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 171-180, Spring.
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    Citations

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    Cited by:

    1. Shiyou Li & Emeka Nwaeze & Jennifer Yin, 2016. "Earnings management in the electric utility industry: profit incentives," Review of Quantitative Finance and Accounting, Springer, vol. 46(3), pages 633-660, April.
    2. Mirucki, Jean, 1980. "Comportement de l'entreprise réglementée: étude de l'hypothèse Averch-Johnson
      [Behavior of the Regulated Firm: A Study of the Averch-Johnson Hypothesis]
      ," MPRA Paper 27669, University Library of Munich, Germany, revised 1982.
    3. Paul L. Joskow, 2014. "Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks," NBER Chapters,in: Economic Regulation and Its Reform: What Have We Learned?, pages 291-344 National Bureau of Economic Research, Inc.
    4. Hadlock, Charles J & Lee, D Scott & Parrino, Robert, 2002. "Chief Executive Officer Careers in Regulated Environments: Evidence from Electric and Gas Utilities," Journal of Law and Economics, University of Chicago Press, vol. 45(2), pages 535-563, October.
    5. Perrakis, Stylianos, 1989. "Les contributions de la théorie financière à la solution de problèmes en organisation industrielle et en microéconomie appliquée," L'Actualité Economique, Société Canadienne de Science Economique, vol. 65(4), pages 518-546, décembre.
    6. Carlos Perez Montes, 2012. "Regulatory bias in the price structure of local telephone services," Working Papers 1201, Banco de España;Working Papers Homepage.
    7. Heather E. Campbell, 1996. "The politics of requesting: Strategic behavior and public utility regulation," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 15(3), pages 395-423.
    8. Graeme Guthrie, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Journal of Economic Literature, American Economic Association, vol. 44(4), pages 925-972, December.
    9. Mirucki, Jean, 1980. "Vérification des conditions d'efficacité dans la production chez Bell Canada
      [Checking the conditions of efficient production in Bell Canada]
      ," MPRA Paper 30147, University Library of Munich, Germany, revised Jun 1980.
    10. Doucet, Joseph & Littlechild, Stephen, 2006. "Negotiated settlements: The development of legal and economic thinking," Utilities Policy, Elsevier, vol. 14(4), pages 266-277, December.
    11. Doucet, J. & Littlechild, S., 2006. "Negotiated Settlements: The development of economic and legal thinking," Cambridge Working Papers in Economics 0622, Faculty of Economics, University of Cambridge.
    12. Pérez Montes, Carlos, 2013. "Regulatory bias in the price structure of local telephone service," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 462-476.
    13. Guthrie, Graeme, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Working Paper Series 3851, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    14. Boyle, Glenn & Evans, Lewis & Guthrie, Graeme, 2006. "Estimating the WACC in a Regulatory Setting: An Assessment of Dr Martin Lally's paper 'The Weighted Average Cost of Capital for Electricity Lines Businesses' of 8 September 2005," Working Paper Series 3844, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.

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