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Methods of Price Regulation

In: Price Regulation and Risk

Author

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  • Michael Hierzenberger

Abstract

There are essentially two methods for defining fair prices in regulated industries. The first method, known as rate of return regulation, routinely fixes prices in the amount of the actual costs.1,2 The second method, known as RPI-X regulation, defines prices on the basis of a price or profit formula.3 In this case, the price of the current period consists of the price of the previous period subtracted by the mandatory efficiency boosts that take the form of price surcharges and price increases, in order to compensate for the general price escalation.4 In the following, both of these different systems will be defined more carefully. On the basis of the principle agent theory, a statement is made in Sect. 3.2 about which different incentive effects both of these systems have intrinsically for boosting efficiency in providing a service.

Suggested Citation

  • Michael Hierzenberger, 2010. "Methods of Price Regulation," Lecture Notes in Economics and Mathematical Systems, in: Price Regulation and Risk, chapter 0, pages 29-44, Springer.
    • Handle: RePEc:spr:lnechp:978-3-642-12047-3_3
    DOI: 10.1007/978-3-642-12047-3_3
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