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The pricing dynamics of utilities with underdeveloped networks

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  • Chisari, Omar O.
  • Kessides, Ioannis N.

Abstract

This paper uses an analytically tractable intertemporal framework for analyzing the dynamic pricing of a utility with an underdeveloped network (a typical case in most developing countries) facing a competitive fringe, short-run network adjustment costs, theft of service, and the threat of a retaliatory regulatory review that is increasing with the price it charges. This simple dynamic optimization model yields a number of powerful policy insights and conclusions. Under a variety of plausible assumptions (in the context of developing countries) the utility will find its long-run profits enhanced if it exercises restraint in the early stages of network development by holding price below the limit defined by the unit costs of the fringe. The utility's optimal price gradually converges toward the limit price as its network expands. Moreover, when the utility is threatened with retaliatory regulatory intervention, it will generally have incentives to restrain its pricing behavior. These findings have important implications for the design of post-privatization regulatory governance in developing countries.

Suggested Citation

  • Chisari, Omar O. & Kessides, Ioannis N., 2007. "The pricing dynamics of utilities with underdeveloped networks," Policy Research Working Paper Series 4198, The World Bank.
  • Handle: RePEc:wbk:wbrwps:4198
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    References listed on IDEAS

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    2. Alvin K. Klevorick, 1973. "The Behavior of a Firm Subject to Stochastic Regulatory Review," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 57-88, Spring.
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    Keywords

    Economic Theory&Research; Markets and Market Access; Urban Water Supply and Sanitation; Infrastructure Regulation; Access to Markets;
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