Dynamics of Price Regulation

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-ofreturn 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. Finally, we interpret recent regulatory reforms in telecommunications markets.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 118 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.