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Monopoly Regulation Through Cost-Based Revenue Caps: Employing A Base Year Approach

Author

Listed:
  • Gerrit Gräper

    (University of Kassel, Nora-Platiel-Straße 4, 34127 Kassel, Germany)

  • Fabian Mankat

    (University of Kassel, Nora-Platiel-Straße 4, 34127 Kassel, Germany)

Abstract

This paper studies the pricing incentives of a monopolist constrained by a revenue cap endogenously determined by her costs in a so-called base year. Such regulation is employed, among others, to govern electricity distribution operators in Germany. We show that the revenue cap may incentivize excessive supply in the base year to reap profits in the non-base years. A connected set of price caps exists so that a hybrid regulation consisting of any element in this set and the cost-based revenue cap unambiguously improves welfare and, under some conditions, even leads to the socially optimal outcome.

Suggested Citation

  • Gerrit Gräper & Fabian Mankat, 2024. "Monopoly Regulation Through Cost-Based Revenue Caps: Employing A Base Year Approach," MAGKS Papers on Economics 202404, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    • Handle: RePEc:mar:magkse:202404
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    File URL: https://uni-marburg.de/en/fb02/research-groups/economics/macroeconomics/research/magks-joint-discussion-papers-in-economics/papers/2024/4-2024-graper.pdf
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    More about this item

    Keywords

    Regulation; Monopoly; Electricity Distribution;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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