Dynamics of Price Regulation

Posted: 20 Nov 2000

See all articles by Gary Biglaiser

Gary Biglaiser

University of North Carolina

Michael H. Riordan

Columbia University - Columbia Business School

Abstract

We study the dynamics of price regulation for an industry adjusting to exogenous technological progress. First, we characterize the optimal capacity path and replacement cycles in a neoclassical investment model. Second, we show that naive rate-of-return regulation, which ignores components of economic depreciation, eventually results in a deficient level of capacity due to excessively high retail prices burdened by the need to recover the underdepreciated costs of historical investments. Third, we explain how price-cap regulation leads to more efficient capital replacement decisions compared to naive rate-of-return regulation, and we show how finite price-cap horizons distort capital replacement decisions compared to optimal regulation. Finally, we interpret recent regulatory reforms in telecommunications markets.

Suggested Citation

Biglaiser, Gary and Riordan, Michael H., Dynamics of Price Regulation. Available at SSRN: https://ssrn.com/abstract=244847

Gary Biglaiser (Contact Author)

University of North Carolina ( email )

Chapel Hill, NC 27599
United States
919-966-4884 (Phone)
919-966-4986 (Fax)

Michael H. Riordan

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States
212-854-6984 (Phone)

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