Monopoly Regulation, Chilean Style: The Efficient-Firm Standard In Theory And Practice
This paper analyses the foundations of “efficient-firm” regulation (implemented in Chile for almost two decades), and the formulas that are used to set the prices of water/sanitation companies, electric power distributors and the dominant phone companies. We show that efficient-firm regulation implies setting prices equal to long-run average cost, which is optimal when the firm is required to be self-financing. In contrast, this is not true of the best-known alternatives, namely regulation based on rate-of-return or a price cap. We also show that in both efficient-firm and price-cap regulation, the fixed and exogenous period that is maintained between price-setting processes stimulates productive efficiency. We argue that the price-setting formulas and procedures used assume that the regulator has sufficiently precise information to determine the costs of a hypothetical efficient firm, without the need for information from the real firm. Nonetheless, modern regulatory theory and practice both show that prices cannot be set without drawing upon information that only the real firm possesses. The model developed in this paper is used to discuss the potential gains from replacing efficient-firm regulation by a price cap. We conclude that price-cap regulation also requires considerable amounts of information from the real firm; so, for the time being, Chile should focus on improving regulatory procedures, rather than changing the underlying mechanism.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
When requesting a correction, please mention this item's handle: RePEc:edj:ceauch:182. 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: ()
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.