Tighter Price Cap Regulation on Consumer Surplus and Utility
Kang, Weisman, and Zhang (2000) demonstrated that, under a tighter price cap, consumer welfare increases with the independence of demands. Conversely, the tighter price cap may negatively impact consumer welfare in situations involving interdependent demands. This paper identifies an overlooked property of Kang et al. (2000), namely, that the cross-price effects should be symmetrical without an income effect and demand functions of a Hicksian type. This paper reveals the invariant conclusion that consumers always benefit from a tighter price cap. Besides, it further derives the effects of the tighter price cap on consumer utility, and concludes that the net price elasticity of demand is the key to the effect of the average revenue constraint.
Tighter Average Revenue Regulation Can Reduce Consumer Welfare
A monopolist producing for two markets is subject to an average revenue constraint, a form of regulation which is relevant to some U.K. utilities. Where marginal costs of serving the two markets differ, tighter regulation may cause one of the prices to rise as shown by I. Bradley and C. Price (1988). A simple linear example demonstrates that total consumer surplus may fall as regulation becomes more stringent. Copyright 1995 by Blackwell Publishing Ltd.
Diversification incentives under "price-based" and ";cost-based" regulation
This article considers two schemes of regulation for firms that serve both monopoly markets and markets subjected to substantial competition. The first form ("cost-based" regulation) combines elements of rate-of-return regulation (on monopoly markets) with fully distributed cost pricing, much like the form of regulation currently in place in the domestic telephone industry. The second form ("price-based" regulation) would establish rate caps on noncompetitive services, and allow the firm to enter into competitive markets and charge whatever prices it might like in those markets. Models of both forms of regulation are developed and analyzed with respect to incentives for cost misreporting, choice of technology, cost-reducing innovation, choices of prices and output levels, and diversification into competitive markets.