Setting the X Factor in Price Cap Regulation Plans

29 Pages Posted: 4 Oct 1999 Last revised: 3 Apr 2022

See all articles by Jeffrey I. Bernstein

Jeffrey I. Bernstein

Carleton University - Department of Economics; National Bureau of Economic Research (NBER)

David E. M. Sappington

University of Florida - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: June 1998

Abstract

Despite the popularity of price cap regulation in practice, the economic literature provides relatively little guidance on how to determine the X factor, which is the rate at which inflation -adjusted output prices must fall under price cap plans. We review the standard principles that inform the choice of the X factor, and then consider important extensions. We analyze appropriate modifications of the X factor: (1) when only a subset of the firm's products are subject to price cap regulation, and when product-specific costs and productivity cannot be measured; (2) when the pricing decisions of the regulated firm affect the economy-wide inflation rate; and (3) in the presence of structural changes in the industry, such as a strengthening of competitive forces.

Suggested Citation

Bernstein, Jeffrey I. and Sappington, David E. M., Setting the X Factor in Price Cap Regulation Plans (June 1998). NBER Working Paper No. w6622, Available at SSRN: https://ssrn.com/abstract=160969

Jeffrey I. Bernstein (Contact Author)

Carleton University - Department of Economics ( email )

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David E. M. Sappington

University of Florida - Department of Economics ( email )

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