This paper demonstrates, in a dynamic model of monopoly regulation with price-cap, that a periodic price review may increase productive efficiency. When the firm’s choice of cost-reducing effort depends on the volume of output supplied, a periodic revision allows the regulator to set more binding prices, thus inducing the monopolist to exert more cost-reducing effort in the future. In a continuous-time setting we establish the conditions under which, within a given concession period, a single full rate base review improves cost-efficiency, and by this route, we also establish the optimal number of reviews. This number depends on the length of the concession period in relation to the slope of the demand function and the intensity of the disutility of effort. Our results add both a theoretical argument in favour of the practice of periodic reviews in price-cap regulation and provide regulators with a basis for the calculation of the optimal regulatory lag.

Optimal price-cap reviews / Giuseppe, Coco; DE VINCENTI, Claudio. - In: UTILITIES POLICY. - ISSN 0957-1787. - 16:4(2008), pp. 238-244. [10.1016/j.jup.2008.04.002]

Optimal price-cap reviews

DE VINCENTI, Claudio
2008

Abstract

This paper demonstrates, in a dynamic model of monopoly regulation with price-cap, that a periodic price review may increase productive efficiency. When the firm’s choice of cost-reducing effort depends on the volume of output supplied, a periodic revision allows the regulator to set more binding prices, thus inducing the monopolist to exert more cost-reducing effort in the future. In a continuous-time setting we establish the conditions under which, within a given concession period, a single full rate base review improves cost-efficiency, and by this route, we also establish the optimal number of reviews. This number depends on the length of the concession period in relation to the slope of the demand function and the intensity of the disutility of effort. Our results add both a theoretical argument in favour of the practice of periodic reviews in price-cap regulation and provide regulators with a basis for the calculation of the optimal regulatory lag.
2008
01 Pubblicazione su rivista::01a Articolo in rivista
Optimal price-cap reviews / Giuseppe, Coco; DE VINCENTI, Claudio. - In: UTILITIES POLICY. - ISSN 0957-1787. - 16:4(2008), pp. 238-244. [10.1016/j.jup.2008.04.002]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11573/13065
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