Autore
Di Gioacchino, DeboraTitolo
Cost padding in regulated markets with demand uncertaintyPeriodico
Università degli Studi di Roma "La Sapienza" - Dipartimento di Economia Pubblica. Working PaperAnno:
2004 - Volume:
5 - Fascicolo:
72 - Pagina iniziale:
1 - Pagina finale:
32This paper presents a simple model of a non-competitive market with demand uncertainty in which firms can choose their technology of production. Technology is characterised by two parameters: capacity and
flexibility. The first has a strong commitment value while flexibility is
needed to face uncertainty. Lack of competition requires active regulation
to ensure that the price is not set at excessive level. When choosing their
technology, firms take into account not only the effects of this choice on the opponent(s) but also the effect on the regulated price. In this framework, and because of regulation, firms have an incentive to manipulate their costs
(cost padding). This causes monopoly regulation aiming at improving allocative efficiency to be ineffective. Increasing the number of firms in the market may restore regulation effectiveness. The reason is that if demand is sufficiently volatile, then firms strategically choose flexible techniques and this effect dominates over the incentive to manipulate costs in order to
escape regulation. In this case regulation is effective precisely because cost padding is hampered by firms’ non-cooperative behaviour.
SICI: 1974-2940(2004)5:72<1:CPIRMW>2.0.ZU;2-2
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