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Price and Quality Regulation in a Physical Network Industry

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  • Emanuela Michetti

Abstract

Our paper models the relationship between price and quality regulation in a physical network industry. The analysis is closely inspired by some of the major regulatory features of the current organisation of the British railways industry, even though its insights have more general implications. Our model focuses on the combination of price and quality regulation and accounts for the existence of entry costs which create a competitive advantage for the incumbents in the competitive franchise bidding. We show that the effectiveness of the quality control is nonmonotone in the quality standard set by the Regulator. Moreover, we advance that price regulation negatively affects the extent to which the service quality can be controlled. By partially subsidising the entry costs, the Regulator can intensify the competition for the market and improve the regulation of the service quality. Nevertheless, since entry costs subsidisation involves social costs (e.g., distortionary taxation), the Regulator faces a trade-off between price regulation, on the one hand, and quality regulation and entry costs subsidisation, on the other hand.

Suggested Citation

  • Emanuela Michetti, 2009. "Price and Quality Regulation in a Physical Network Industry," Department of Economics University of Siena 578, Department of Economics, University of Siena.
    • Handle: RePEc:usi:wpaper:578
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    1. Luisa Affuso & David Newbery, 2002. "The Impact of Structural and Contractual Arrangements on a Vertically Separated Railway," The Economic and Social Review, Economic and Social Studies, vol. 33(1), pages 83-92.
    2. Oliver E. Williamson, 1976. "Franchise Bidding for Natural Monopolies -- in General and with Respect to CATV," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 73-104, Spring.
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    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L9 - Industrial Organization - - Industry Studies: Transportation and Utilities

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