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Why Less May Be More under Price-Cap Regulation

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  • Weisman, Dennis L

Abstract

The incentive regulation literature has focused on how to discipline the regulated firm. Here, in the Chicago School tradition, we consider how price-cap regulation might enable the firm to discipline the regulator. We show that under quite general conditions, the firm will prefer profit-sharing to pure price-cap regulation under which it retains one hundred percent of its profits. Profit-sharing limits the incentives of the regulator to take actions adverse to the firm's financial interests. The discipline imposed on the regulator results in a more profitable regulatory environment for the firm. Copyright 1994 by Kluwer Academic Publishers

Suggested Citation

  • Weisman, Dennis L, 1994. "Why Less May Be More under Price-Cap Regulation," Journal of Regulatory Economics, Springer, vol. 6(4), pages 339-361, December.
    • Handle: RePEc:kap:regeco:v:6:y:1994:i:4:p:339-61
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    Cited by:

    1. Sappington, David E. M. & Weisman, Dennis L., 1996. "Potential pitfalls in empirical investigations of the effects of incentive regulation plans in the telecommunications industry," Information Economics and Policy, Elsevier, vol. 8(2), pages 125-140, June.
    2. David Sappington & Dennis Weisman, 2010. "Price cap regulation: what have we learned from 25 years of experience in the telecommunications industry?," Journal of Regulatory Economics, Springer, vol. 38(3), pages 227-257, December.
    3. Dennis L. Weisman, 2019. "The power of regulatory regimes reexamined," Journal of Regulatory Economics, Springer, vol. 56(2), pages 125-148, December.
    4. Weisman, Dennis L., 2002. "Is there 'Hope' for price cap regulation?," Information Economics and Policy, Elsevier, vol. 14(3), pages 349-370, September.
    5. Franz, Oliver & Schäffner, Daniel & Trage, Bastian, 2005. "Grundformen der Entgeltregulierung: Vor- und Nachteile von Price-Cap, Revenue-Cap und hybriden Ansätzen," WIK Discussion Papers 267, WIK Wissenschaftliches Institut für Infrastruktur und Kommunikationsdienste GmbH.
    6. Dale Lehman & Dennis Weisman, 2000. "The Political Economy of Price Cap Regulation," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 16(4), pages 343-356, June.
    7. 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.
    8. Weisman, Dennis L., 2002. "Strategic sharing in regulatory regimes," Economics Letters, Elsevier, vol. 75(3), pages 361-367, May.

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