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Tight Average Revenue Regulation Can Be Worse Than No Regulation

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  • Simon G. B. Cowan

Abstract

Price regulation of a multi‐market monopolist, with the cap based on average revenue, can cause welfare to be below the unregulated level. In a model with linear demands and constant but unequal marginal costs, a sufficient condition for this welfare effect is that the cap equals the average revenue that would be earned with marginal cost pricing. Relaxation of the price cap can lower all prices. Welfare with uniform pricing at the level of the price cap can be above or below the average revenue welfare level.

Suggested Citation

  • Simon G. B. Cowan, 1997. "Tight Average Revenue Regulation Can Be Worse Than No Regulation," Journal of Industrial Economics, Wiley Blackwell, vol. 45(1), pages 75-88, March.
    • Handle: RePEc:bla:jindec:v:45:y:1997:i:1:p:75-88
    DOI: 10.1111/1467-6451.00035
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    Citations

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    Cited by:

    1. Söderberg, Magnus & Vesterberg, Mattias, 2023. "How demand uncertainty influences electricity network prices under revenue-cap regulation: The case of Sweden," Energy Economics, Elsevier, vol. 127(PB).
    2. Filippini, M. & Greene, W. & Masiero, G., 2018. "Persistent and transient productive inefficiency in a regulated industry: electricity distribution," Energy Economics, Elsevier, vol. 69(C), pages 325-334.
    3. Breton, Michèle & Kharbach, Mohammed, 2012. "Transportation and storage under a dynamic price cap regulation process," Energy Economics, Elsevier, vol. 34(4), pages 918-929.
    4. Massimo Filippini & William Greene & Giuliano Masiero, 2016. "Persistent and transient productive inefficiency in a regulated industry: electricity distribution in New Zealand," IdEP Economic Papers 1603, USI Università della Svizzera italiana.
    5. Lantz, Björn, 2008. "Hybrid revenue caps and incentive regulation," Energy Economics, Elsevier, vol. 30(3), pages 688-695, May.
    6. World Bank, 2006. "Approaches to Private Participation in Water Services : A Toolkit," World Bank Publications - Books, The World Bank Group, number 6982.
    7. 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.
    8. Felix Höffler, 2006. "Monopoly Prices versus Ramsey-Boiteux Prices: Are they “Similar”, and: Does it Matter?," Journal of Industry, Competition and Trade, Springer, vol. 6(1), pages 27-43, March.
    9. Matsukawa, Isamu, 2008. "The effects of average revenue regulation on electricity transmission investment and pricing," Energy Economics, Elsevier, vol. 30(3), pages 696-714, May.
    10. Gianni De Fraja & Alberto Iozzi, "undated". "Short Term and Long Term Effects of Price Cap Regulation," Discussion Papers 00/61, Department of Economics, University of York.
    11. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 27, pages 1557-1700, Elsevier.

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