 Towards efficient pricing in monopolistic markets: A theoretical analysis of cost-based revenue caps employing a base-year approachGerrit Gräper and Fabian Mankat Energy Economics, 2025, vol. 144, issue C Abstract: This paper examines the pricing incentives of a monopolist who operates annually in a market while constrained by an endogenous revenue cap. The time horizon is divided into regulatory periods, each consisting of one base year and multiple non-base years. The revenue cap for each year is determined by the monopolist’s costs in the base year of the previous regulatory period. This regulation is used, among others, to govern electricity distribution operators in Germany. We show that this cost-based revenue cap may incentivize excessive supply in base years to reap profits in non-base years, ultimately resulting in a suboptimal outcome in terms of social welfare. Combining the revenue cap with a price cap can improve welfare while requiring relatively little information: We demonstrate that a set of price caps exists such that a hybrid regulation consisting of any element in this set and the cost-based revenue cap unambiguously improves welfare and, under certain conditions, achieves the socially desirable outcome. Keywords: Regulation; Monopoly; Electricity distribution (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:144:y:2025:i:c:s014098832500132x DOI: 10.1016/j.eneco.2025.108309 Access Statistics for this article Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant More articles in Energy Economics from Elsevier |
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