On Intertemporal Subsidy-Free Prices and Economic Depreciation: Constrained Market Pricing Revisited

The constrained market pricing approach to regulating monopolies maintains that prices should be "subsidy-free", lying between the often expansive bounds of stand alone and incremental costs. For a simple two-good/two-period model of a monopolist subject to a zero profit constraint, it is shown that subsidy-free prices are those which rise to the amortized opportunity cost of the currently optimal asset configuration required to meet both current and future demand, providing--in some circumstances--justification for accelerated depreciation. Such intertemporal subsidy-free prices recognize that the stand alone cost of existing assets to current consumers depends on the value of those assets to future consumers. Hence, if a feasible resale price for the fixed costs of capacity exists within or between periods, then intertemporal stand alone costs and intertemporal incremental costs are driven to equality. Copyright 2003 by Kluwer Academic Publishers