Setting the X Factor in Price-Cap Regulation Plans

Jeffrey Bernstein and David Sappington

Journal of Regulatory Economics, 1999, vol. 16, issue 1, 5-25

Abstract: Despite the popularity of price-cap regulation in practice, the economic literature provides limited guidance on how to determine the X factor, which is the rate at which inflation-adjusted output prices must fall under price-cap plans. We review the relevant basic principles, and then determine how to set the X factor: (1) when only a subset of the firm's products are subject to price-cap regulation, and when product-specific costs and productivity cannot be measured; (2) when changes in regulated prices affect the economy-wide inflation rate; and (3) in the presence of such structural changes as strengthened competitive forces. Copyright 1999 by Kluwer Academic Publishers

Date: 1999
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Working Paper: Setting the X Factor in Price Cap Regulation Plans (1998)
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