an analysis of interfirm cooperation theory and evidence from electric power pools this paper develops and tests a model for analyzing the extent to which an individual utility participates in a power pool it incorporates the benefits and costs of pool membership in a profit maximization model of an individual utility the study finds that coordination reflects the benefits and costs the degree to which other utilities are committed to the pool and the utility s behavior toward other utilities the results show that large firms are reluctant to pool with small firms and the us pools tend to be loosely coordinated policy implications are that regulatory commissions can be instrumental in coordination efforts and that interstate cooperation among regulatory authorities is needed to encourage pooling and obtain regional solutions to regional problems it is also important to reduce the transactional costs of pooling wherever possible 37 references 3 figures 1 table

measuring returns to scale in dea models when the firm is regulated in the standard framework of data envelopment analysis dea models the returns to scale are fully characterized using the multiplier on the convexity constraint of inefficient decision making units dmu using the projection of the input output vector on the frontier in this note we investigate how the returns to scale measurements in dea models are affected by the presence of regulatory constraints these additional constraints change the role played by the convexity constraint in order to avoid biased estimation of the returns to scale we show that the interaction between the regulatory and the convexity constraints has to be taken into account

shared inputs over capitalization and regulation abstract when inputs are joint in production a partially regulated firm has the incentive to allocate all joint inputs to the regulated jurisdiction the regulated firm if required to allocate costs will have less of an incentive to over capitalize

the impact of regulation on technical change input based regulation restricts a firm s input choices to a subset of those that characterize the production technology the averch johnson hereafter a j 1962 hypothesis states that rate of return regulation affects a firm s input demands for producing its selected output level given that firms can select the level of innovations in inputs through research and development rate regulation can also impact a firm s selection of innovations among inputs regulation s influence on the choice of innovations also impacts the rate at which technical change occurs in an industry the a j hypothesis has been examined extensively in the literature the impact of regulation on technical change has received less attention in the literature and is the focus of this paper the subject matter is of some importance in that regulation via the a j hypothesis leads to higher production costs regulation s impact on a firm s selection of innovations can magnify or dampen the rate at which technical change occurs a magnification dampening of the rate of technical change leads to lower higher production costs in addition to regulation s impact on input demands regulation s impact on the rate of technical change can lead to small or large changes in prices for consumers regulators can use the information on regulation and technical change to evaluate the effectiveness of policies aimed at enhancing technical change by how much do the policies affect production costs and how much would consumer prices change due to the policies regulators can also use the information to predict the impact deregulation would have on consumer prices both regulators and consumers can attempt to determine the amount by which consumer prices would change under deregulation smith 1974 and okuguchi 1975 examined the impact of regulation on a firm s choice of innovations they showed theoretically that regulation can alter a firm s choice of innovations

the optimum degree of rate of return regulation a two sector analysis recently considerable attention has been given to the economic effects of rate of return regulation of monopoly firms one of the conclusions of the literature on this subject is that some regulation is always better than no regulation from a welfare point of view the purpose of this paper is to show that such a conclusion does not necessarily hold in a two sector analysis under rate of return regulation the firm s prices are set such that the rate of return to capital does not exceed some fair rate allowed by the regulatory authority it has been asserted that a profit maximizing monopoly firm will react to such a constraint by employing more of all inputs thereby expanding output but will employ more than the efficient level of capital relative to the other inputs 1 8 a corollary to this proposition is that if the regulatory constraint is tightened in the sense of lowering the allowed rateof return toward the market price of capital services the monopoly firm will respond with additional output but will move further from its expansion path if these effects occur such a form of regulation would involve significant welfare considerations from the viewpoint of the economy in which the monopoly firm operates the increased output and corresponding lower unit price represents a benefit however the inefficient use of capital imposes a cost on the economy the question is then whether this form of regulation represents a second best solution more specifically the

a world without intellectual property boldrin and levine against intellectual monopoly in their recent book against intellectual monopoly michele boldrin and david levine conclude that patents and copyrights are not necessary to provide protection for either innovation or creative expression and should be eliminated the authors note the many flaws of the u s system of intellectual property protection and argue that other means are available to appropriate the benefits of invention and creative expression however the authors overlook important functions of intellectual property their efforts would be put to better use by more carefully analyzing policy proposals that may improve our system of intellectual property rights and have some potential to be implemented

effects of regulation and capital market imperfections on the dynamic behavior of a firm the well known result in the theory of a regulated firm known as the averch johnson effect is that a profit maximizing firm subject to rate of return regulation uses an inefficiently high capital labor ratio to produce its chosen level of output numerous contributions in the literature have been instrumental in clarifying the implications and generalizing the model 1 these contributions however have been mostly couched within a static framework few attempts have been made to investigate the effect of rate of return regulation on the dynamic behavior of the firm in particular its investment plans 2 neoclassical models of investment often assume that the rate of investment under

public prioritisation of energy affordability in the uk much research has focused on the so called energy trilemma i e three leading energy policy issues energy security affordability and climate change mitigation whilst substantial understanding exists of why people support climate friendly energy policies little is known about why they think affordability is important particularly what leads members of the public to identify this policy goal as more important than other objectives here we examine this question via a nationally representative survey of 2441 uk residents and demonstrate that concerns about personal costs explain a small amount of variation in the prioritisation of affordability as an energy policy goal a range of other factors also significantly contribute one such factor is beliefs about who is responsible for energy transitions these findings suggest policy actions to address affordability concerns should go beyond energy prices and include additional considerations such as distributive justice and equality

has the averch johnson effect been theoretically justified abstract in this paper we show that the averch johnson effect of overcapitalization by a regulated monopoly does not obtain when the firm operates in the decreasing cost range of output we develop a dynamic adjustment cost model of the firm and apply a recent result by brock and dechert for non concave hamiltonians to solve for the optimal investment policy for the firm with a phase diagram analysis we are able to make sharp comparisons between the regulated and unregulated cases in particular we show that investment by a regulated firm is lower than that of an unregulated firm even when the rate of return constraint is not binding

alternative regulatory methods and firm efficiency stochastic frontier evidence from the u s electricity industry the use of incentive regulation and other alternative regulatory programs in u s electricity markets has grown during the past two decades within a stochastic frontier framework i investigate the effect of individual programs on the technical efficiency of a large set of coal and natural gas generation units i find that those programs tied directly to generator performance and those that modify traditional fuel cost pass through programs to provide a greater incentive to reduce fuel costs are associated with greater efficiency levels other programs have no statistical association with efficiency levels

myths and facts of the utility death spiral abstract as the electricity industry is changing worldwide the swift expansion of basic forms of distributed generation dg particularly photovoltaic deployment threatens the current utility business models that during the transitional stages may challenge the reliability of electricity systems and societal welfare these findings are matters of major concern to policy makers as the shift towards more decentralized power systems must be sustainable and although this brings great opportunities it also pauses important challenges the transition calls for policy and regulation attention for some researchers dg development should be accompanied with design changes to distribution tariffs the addition of connection charge and modifications to net metering while for others certain of these measures could discourage dg investments in this context and given multiple uncertainties the authors propose a system dynamics model to examine the effect of the diffusion of photovoltaic technology on the revenues of utilities and customers the paper concludes that for the colombian case it is possible under certain conditions to attain a balance between social welfare and the aversion of the utility death spiral through systemic interventions

delivering a secure electricity supply on a low carbon pathway abstract the energy system can only be considered sustainable in the long term if it is low carbon affordable and secure these three create a complex trilemma for all stakeholders in the energy business who have to strike a careful balance without neglecting any one aspect this discussion paper examines the issues surrounding security of supply of the power system which has received less attention than the other aspects it looks at how threats and mitigation measures can be classified in terms of where they act on the supply chain and the timescale over which they act only by considering the full range of timescales from seconds to decades can the full picture emerge of the effects of new technologies on security of supply an examination of blackouts over the past 40 years sheds light on the causes of failure to supply and the most vulnerable aspects of the supply chain

capacity utilization and new source bias evidence from the us electric power industry abstract while prior research has shown that new source bias has increased construction costs and delayed the building of new electric power plants this research explores the empirical question of whether increased operating costs caused by new source bias are larger than the cost savings of newer technology if new sources do have higher operating costs an incentive exists to utilize order plants more intensively statistical evidence of these differing utilization rates is found

the averch johnson model with leontief production functions extensions and applications abstract the averch johnson a j thesis suggests that regulated utilities may tend to select production processes which are highly capital intensive the main thrust of this paper is a discussion of the results from developing and implementing the a j theory within the context of an electric utility model used by the energy information administration of the department of energy the objective is to contrast the different forecasts obtained by explicitly incorporating the alternative behavioural theories of cost minimization and profit maximization directly into the model hence rather than testing for the presence of the so called a j effect this paper examines the consequences of assuming the two theories on electric utility behaviour within the context of a single model

what can we learn from the grand policy experiment lessons from so2 allowance trading stable url http links jstor org sici sici 0895 3309 28199822 2912 3a3 3c69 3awcwlft 3e2 0 co 3b2 tthe journal of economic perspectives is currently published by american economic association your use of the jstor archive indicates your acceptance of jstor s terms and conditions of use available athttp www jstor org about terms html jstor s terms and conditions of use provides in part that unless you have obtainedprior permission you may not download an entire issue of a journal or multiple copies of articles and you may use content inthe jstor archive only for your personal non commercial use please contact the publisher regarding any further use of this work publisher contact information may be obtained athttp www jstor org journals aea html each copy of any part of a jstor transmission must contain the same copyright notice that appears on the screen or printedpage of such transmission the jstor archive is a trusted digital repository providing for long term preservation and access to leading academicjournals and scholarly literature from around the world the archive is supported by libraries scholarly societies publishers and foundations it is an initiative of jstor a not for profit organization with a mission to help the scholarly community takeadvantage of advances in technology for more information regarding jstor please contact support jstor org http www jstor orgtue jun 26 16 25 17 2007

optimizing inventory s contribution to profitability in a regulated utility the averch johnson effect the averch johnson effect is a well known economic phenomenon through which regulated utility companies prefer a capital resource input combination that differs from an efficient level through dynamic network data envelopment analysis ndea this paper first investigates the existence of this effect on a dynamic input that is inventory the analysis was performed for a group of public electric utilities from 2005 to 2014 the result implies that these firms procure a significant extra amount in inventory materials and supplies beyond their efficient levels in order to explore the connection of this effect to profit motives we construct an analytical model of the inventory policy controlling the extra buying of material and supplies that will be inventoried and added to the firm s rate base the model is based on maximizing the net present value of total profits in the deterministic case two results are observed i the firm could achieve a finite optimum by adding a finite amount of inventory above the normal base level which assumes no impact of inventory on the rate hearing and ii the firm could theoretically achieve infinite optimum under the unconstrained model the primary contribution of this paper is the special case of extending typical inventory replenishment models to including the impact on prices and in turn profits in a regulated supply chain

positively sloping marginal revenue ces utility and subsistence requirements the possibility that marginal revenue may possess a positive slope has long been recognized as important in her classic the economics of imperfect competition joan robinson 14 accorded considerable significance to the possibility and investigated it at length despite robinson s insights upward sloping marginal revenue functions remained largely a curiosity widely regarded as an overly stringent perversity unlikely to occur in reality considerable doubt was cast on this view when in 1980 a a walters 20 reported the presence of positively sloping marginal revenue in the pricing policies of the port of singapore the case for upward sloping marginal revenue was furthered by formby layson and smith s 8 straightforward demonstration that upward sloping marginal revenue schedules are very easily produced and can never be ruled out because simple parallel shifts in strictly convex demand and or rotations always transform demand schedules with downward sloping marginal revenue into ones with positively sloping schedules this strongly suggests that no theoretically reasonable restrictions can be placed on the behavior of marginal revenue because to do so would rule out such simple transformations as parallel shifts or rotations in demand such restrictions would be too stringent to be acceptable upward sloping marginal revenue has found important application in such diverse topics as catastrophe theory 3 third degree price discrimination 13 dual equilibria and monopolistic competition 11 specific taxes and quality 2 and international trade 7 2 the significance of non monotonic marginal revenue functions is further underscored by the fact that the presence of upward sloping marginal revenue significantly affects the sign of comparative static results for example see 18 260 15 16 2 a shortcoming of previous analyses lies in the fact that they draw conclusions from consideration of slope level and curvature of the demand schedule alone the behavior of marginal revenue derived directly from the more fundamental basis of utility theory has not been examined this paper takes up this question employing wold s theorem to analyze marginal revenue

elasticities of substitution for a regulated cost function abstract this paper proposes a modification to the uzawa 1962 characterization of the allen partial elasticity of substitution under cost minimization to take account of the behavioral properties of the cost function for a firm subject to rate of return regulation

shirking and the choice of technology a theory of production inefficiency with an empirical application abstract we develop a model of shirking and technology choice and show that organizations exercising less effective direct control over shirking adopt technologies that underutilize the workforce to a greater degree relative to neoclassical counterparts in order to control shirking indirectly thus technical inefficiency arises endogenously as a rational response to allocative inefficiency caused by shirking an empirical analysis of data from a sample of collective and private farms operating in jewish palestine reveals the presence of shirking and supports the prediction that farms with less effective direct control over shirking exhibit greater labor hoarding as a manifestation of technical inefficiency

x inefficiency and interfirm rivalry evidence from the electric utility industry competition from the natural gas industry is shown to increase the efficiency of the work force of electric power utilities this conclusion is qualified to the extent that duopoly rivalry does not represent perfect competition in a free market as natural gas reserves decline however the impetus to improve efficiency will diminish but this will be offset by technological advances in both power generation and power transmission if regulators develop policies to encourage competitive interplay utility performance is more likely to improve 38 references 3 tables dck

on the winner take all principle in innovation races what is the optimal allocation of prizes in an innovation race should the winner take all or is it preferable that the original inventor shares the market with subsequent independent duplicators some recent papers in law and economics have argued that the latter more permissive solution is socially preferable under mild conditions we re examine that issue arguing that a permissive regime may turn the innovation race into a waiting game reducing the power of incentives and may invite socially wasteful duplicative r d expenditures in a model that accounts for these effects the winner take all system turns out to be preferable in a broad set of circumstances especially in highly innovative industries jel k11 l1 o34

systematic departures from the frontier a framework for the analysis of firm inefficiency departures from a production or cost frontier may reflect the systematic effect of conditions that contribute to inefficiency to test whether some portion of frontier function departures can be systematically explained the frontier inefficiency error component is modeled as a function of various causal factors and a random component the functional form of the inefficiency error term model is chosen to assure strict one sidedness preliminary empirical results generated from electric utility data suggest the superiority of including both systematic and random components in the inefficiency error term

variations of optimum firm and company town location in the literatures of location and firm behaviour most of the papers deal with location and theory of firms in conjunction with a heterogeneous space where markets are given at discrete points also most of writers of the papers considered the optimum location problem only for an unregulated firm and industry on the other hand there are many regulated firms and industries in real economies also we can consider a location problem of an industrial city industry complex which means a big company town many comparisons after combining some effects such as agglomeration scale economies diseconomies etc were implemented we analysed the optimum location of industrial city big company town and input usage under regulatory constraint and agglomeration we introduced an active constraint of a fair rate of return from the pioneering work of averch and johnson to the location problem of the big firm with multi inputs with multi inputs simple one dimension locational problems are solved

dynamic behavior of the firm with adjustment costs under regulatory constraint abstract this paper investigates the optimal investment behavior of the regulated profit maximizing firm in a dynamic context the modern adjustment cost approach to investment is incorporated into the theory of a regulated firm which has typically been discussed in a static framework this paper thus generalizes the well known averch johnson thesis which is proved in the static context the paper investigates both the finite and infinite horizon cases

effects of regulation on utility financing theory and evidence standing of these cross sectional variations might be afforded by the detailed examination of specific industry characteristics and their relationship to firms financing patterns the present study offers a methodology for approaching this issue the first step is to assemble joint theories of industry and financial structure in order to identify the ways in which changing industry conditions might be associated with changes in financing evidence on such simultaneous changes can then be examined in an attempt to identify the most plausible joint theory the methodology is used to investigate the effects of state commission regulation on the financing of electric utilities this is a natural candidate for study since regulation is such a salient feature of the industry in addition the regulatory system imparts some interesting special features to the very nature of utility capital structures inherent in all capital structures for example are opportunities for shifting wealth between bondholders and shareholders but under regulation these wealth shifting opportunities are expanded to encompass consumers as well finally the study of regulation has resulted in several relatively well specified theories of why regulation is imposed and what its observable effects should be in section i the different theories of capital structure and regulation are discussed and their joint implications are derived the capital structure theories include the perfect capital market theory the debt capacity theory and the financing hierarchy theory the regulatory theories include the public interest or market failure theory the political economy theory and the imperfect monitoring theory in section ii financing data from the early days of state commission utility regulation are used to try to distinguish

regulation of administered prices an empirical analysis of the microeconomics of price movement in finland 1972 77 curiously enough the concept of administered prices launched by gardiner means in his 1934 report to the u s secretary of agriculture still shows up in discussions on price policy and control today almost fifty years since it was coined and three decades after the discussion2 in which it should have been buried even more astonishing is the fact that its spin off administered inflation a term introduced by the kefauver committee in 1957 3 is still a part of economic language in some instances in the basic formulation that of means in 1935 administered prices are not assumed to be explicitly linked with market power but simply prices set by administrative action and held constant for a period of time means 12 p 78 although the hypothesis in this form was based on no economic reasoning of acceptable clarity it might still be accepted for the simple truism it is clearly some prices will change more seldom than others since for one thing costs of price changes will vary as is intuitively clear and as shown by sheshinski and weiss 17 pp 294 95 the optimal strategy of a firm in an inflationary environment will consist of longer intervals between successive price changes the higher the cost of such a change is under some very special assumptions risk aversion may also serve as an explanation to a decrease in the number of price changes relative to the number of changes in cost as indicated by the results of schramm and sherman 1 5 4 the administered inflation hypothesis as forwarded by means in his 1957 testimony before the kefauver committee means 12 pp 101 29 and by

a general equilibrium analysis of financial regulation abstract this paper utilizes a general equilibrium approach to investigate the factor returns and output effects on a regulated and unregulated sector from imposition of a rate of return on investment regulatory constraint the results differ from those of the traditional partial equilibrium model of the regulated firm as originally developed by averch and johnson aj the differences are explained by the fact that the general equilibrium approach assumes the existence of efficient capital markets whereas the aj approach does not introduction of the competitive capital market framework in the study of financial regulation through the general equilibrium methodology is this paper s major contribution

behavior of the firm under regulatory constraint a recent article by akira takayama discusses an earlier paper by harvey averch and leland l johnson on fair rate of return regulation of public utilities although takayama p 255 agrees with averch and johnson s general conclusions that a firm will tend to increase its investment with the introduction of an active constraint on its rate of return he criticizes the a j argument as being confusing ambiguous and in error takayama then attempts a clarification and presents a new formulation which leads to the a j result quoted above this comment will discuss several of takayama s criticisms in addition to showing that the so called a j effect cannot be derived from the basic assumptions made by both averch and johnson and takayama 1 we will show that the very assumptions used to prove the a j effect by defining the region of x require an assumption that the a j effect exists in the first place

the influence of the economic approaches to regulation on banking regulations a short history of banking regulations this article highlights the theoretical foundations of the regulations at work in the banking sector and examines their responsibility in the onset of the 2007 2008 financial crisis drawing a parallel between the main changes in banking regulations since the 1960s and the evolutions in the economic analyses of regulation over the same period it shows that the shift from the public interest theory of regulation that prevailed until the late 1960s towards the private interest theory of regulation accounts for the substitution of micro prudential regulations for macro prudential ones and explains a paradigmatic change in the conception of the regulatory instruments of the banking authorities it also shows that although the outcome of several factors the 2007 2008 crisis was also a consequence of the fact that the economic analysis of banking regulations supported micro prudential regulations that fail to take the global features and impact of banking activities into account and have proved unable to recommend effective solutions in a context of crisis

estimated elasticities from regulated and unregulated cost functions abstract estimates of the allen partial elasticities of substitution aes for a regulated cost function smith 1981 are compared with those obtained from an unregulated cost function the aes for capital and variable inputs are reasonably similar but those between variable inputs differ significantly

regulation and investment use newly assembled data on regulation in several sectors of many oecd countries to provide evidence that regulatory reform of product markets is associated with an increase in investment a component of reform that plays a very important role is entry liberalization but privatization also has a substantial effect on investment sensitivity analysis suggests that our results are robust jel e22 l5

efficiency based rank assessment for electric power industry a combined use of data envelopment analysis dea and dea discriminant analysis da abstract this study discusses a combined use of dea data environment analysis and dea da discriminant analysis to determine the efficiency based rank of energy firms this type of performance evaluation is important because we often have a difficulty in accessing a large sample on energy firms to derive reliable empirical results the proposed approach is useful in dealing with such a limited number of energy firms often found in previous dea studies on energy industries in the world the proposed approach uses dea to classify energy firms into efficient and inefficient groups based upon their efficiency scores then it utilizes dea da to assess their efficiency scores and ranks in this stage we can find an adjusted efficiency score for each energy firm the proposed approach provides us with the following analytical capabilities all of which cannot be found in a conventional use of dea in assessing energy firms first the proposed dea approach can avoid zero in all multipliers on efficient energy firms by incorporating scsc strong complementary slackness condition so that it can handle an occurrence of multiple reference sets and multiple projections the dea result classifies all energy firms into efficient and inefficient groups second dea da applied to the two groups evaluates all energy firms by an industry wide evaluation not depending upon a limited number of efficient energy firms in a reference set as found in a conventional use of dea the analytical capability can reduce the number of efficient energy firms third the proposed approach can provide their efficiency based ranking scores finally we can conduct a rank sum test based upon their ranking scores to obtain a statistical inference as an application this study uses the proposed approach to examine the performance of japanese electric power industry we find two economic implications one of the two implications is that no major change has occurred in the operational performance of japanese electric power industry because of japanese sluggish economy from 2005 to 2009 the other implication indicates that there are strategic differences in the operation of japanese electric power firms after the liberalization

capital vintage time trends and technical change in the electric power industry beginning with tinbergen in 1942 economists have employed a time trend in cost or production functions to represent the rate at which new technology is introduced into the production unit in sufficiently flexible models of the production process the time trend may be used to obtain estimates of the rate as well as direction of technical change the use of the time trend is generally defended on pragmatic grounds as no theoretical justification exists for assuming that new technology is introduced at a steady rate that is independent of a firm s investment in r d education capital of a more recent vintage etc in recent years alternatives to the traditional time trend have been sought to represent the rate at which new technology is introduced research in this area has been concentrated in the telecommunications industry where the stock of r d or the percentage of calls completed by direct dialing or modern switching facilities have been employed as technological indices by nadiri and schankerman 32 denny et al 14 and christensen et al 7 the latter two studies indicate that explicit technological indices provide a better representation of the pace of innovation than the time trend this conclusion must remain tentative however as it is not possible to determine what is the true direction of technical change in these studies this shortcoming is overcome in a recent study by kopp and smith 24 who compare the performance of time trends and explicit technological indices in a study using pseudo data generated by process analysis models their results unambiguously support the use of technologically explicit indicators of technical change and indicate that the use of a time trend may not provide a consistent estimate of the direction of technical change this study does not however shed any light on the ability of a time trend to accurately reflect the rate of technical change the purpose of this study is to investigate the effects of alternative technological indices on the estimated rate and direction of technical change in the electric power industry the performance of a time trend is compared with that of a vintage index computed as the average age of a firm s steam generating capacity this latter index is consistent with the notion that new technology is embodied in newly constructed capital an assumption sup

post entry competition in the plain paper copier market this paper reviews events in the plain paper copier ppc market immediately after xerox s monopoly ended xerox s behavior and that of a flood of ppc entrants are viewed through the lens of recent advances in the theory of entry and entry deterrence the events of the early post entry period also cast some interesting light on the theory of technological competition the modern theory of entry deterrence rests on a simple if not obvious proposition the socially worst industry performance is after entry the more monopolies there will be since the interests of the entrant and society are opposed once entry has occurred a series of papers have considered endogenous changes in the conditions of competition monopolists who make their industry more competitive conditional on entry in order to deter potential entrants there are two distinct steps in the entry deterrence argument first it must be possible for events during the monopoly period to affect postentry competition some intertemporal complication must be present either in costs or in firm specific demand if the state of the industry at the time of entry is to form important initial conditions for competition second the monopolist must find it profitable to manipulate the initial conditions by some pre entry action the general theoretical questions of entry and deterrence have been cast in quite specific terms for the problem of technological competition one view emphasizes the arrow effect kenneth arrow 1962 jennifer reinganum 1983 drew fudenberg and jean tirole because any innovation destroys some of the rents to older products and processes incumbent monopolists have a smaller incentive to innovate than potential entrants another view richard schmalensee 1983 richard gilbert and david newbery 1982 points out that the incumbent s losses from entrant s innovation create a motive for preemptive r d product introduction or patenting if incumbents are leaders and entrants followers the second view will hold independent of technology note that the difference is over the profitability of entry deterring strategies in both views the presence of valuable assets like patents or secrets provides the necessary intertemporal link events in the ppc market during the time of xerox s monopoly did have a substantial impact on the nature of competition in the early postentry period an arrow effect is evident as are other equilibrium explanations of xerox s rapid decline the alternative explanation that xerox was fat is also considered below

cost efficiency of electric grid utilities in china a comparison of estimates from sfa mle sfa bayes and stoned cnls with the purpose of estimating the range of cost efficiency levels of the power grid sector in china we assembled a data set including 23 provincial power grid companies spanning from 2005 to 2009 and conducted an empirical study based on the sfa mle sfa bayes and stoned cnls methodologies empirical results show that the average values of efficiency from different models vary from 0 85 to 0 92 depending especially on the assumptions underlying inefficiency content further results demonstrate that there is exogenous technical progress during the sample period and per capita gdp of the province is negatively related to the costs of the electric grid company located in the corresponding province we hope this empirical study will contribute to the debate on an efficiency based regulation scheme which was introduced to the chinese electric grid sector on a pilot base in 2014

service quality in the electricity industry the role of privatization and managerial behavior abstract this paper analyzes the relationship between privatization and service quality in the electricity industry and tests the hypothesis that managerial behavior is a significant intervening factor the sample includes 31 italian distributors over the period 1998 2004 their quality performance is represented by continuity of supply an aspect of quality that is both contractible and regulated results of the empirical analysis suggest that the transfer of shareholdings to private investors does not lead to quality degradation the results also suggest that managerial dominance translates into a reduction in supply quality this effect is likely to be particularly strong for public sector utilities

behavior of the firm under regulatory constraint a recent article in this review by averch and johnson 3 on the fair rate of return regulation in public utilities industries or more generally regulated industries attracted the attention of many economists in essence averch johnson argues that the introduction of an active constraint of a fair rate of return type would induce the firm to invest more than the original profit maximizing value of capital and this would create an inefficient allocation of inputs in addition to frequent citations in verbal arguments it has invited some thieoretical extensions by economists such as wvestfield 8 and klevorick 5 all of the writers seem to accept the basic theoretical foundations set by averch and johnson for example klevorick 5 recently proposed that the fair rate of return should be inversely related to the size of the capital of a firm the intuitive basis for this is apparent for it in effect creates a penalty as the amount of capital used by the firm increases however it seems to me that averchjohnson s original arguments are sketchy and contain somewhat ambiguous logic at several important points although their conclusion for which they tried to find empirical support that a firm will tend to increase its investment with the introduction of an active constraint seems to be correct it does not follow from their arguments in particular there seems to be a serious error which arises from confusing movements along a curve and shifts of a curve in section ii we clarify those ambiguities and if necessary correct the mistakes in the third section of this paper we shall provide a new formulation of the problem we shall find that the new formulation will give the same answer as averchjohnson namely that a firm will tend to invest more with the iiltroductioin of an active constraint it should be noted however that while the conclusion happens to be the same this was not the necessity for we needed a completely new formulation to obtain the old conclusion

the future of market regulation market regulation is accomplished both by competition and by external government agencies and the trend is toward greater reliance on competition economists have fostered this trend and have even invented markets to help overcome some externality problems they have contributed to a steady improvement in antitrust policy which currently reflects economic knowledge well they diagnosed and demonstrated problems with external regulation of the airline industry and gave assurance that regulation by competition could work in its place success there led not only to deregulation of airlines but also deregulation of railroads trucks buses and in some ways natural gas pipelines two other industries telecommunications and electricity are now following very ambitious paths toward less external regulation and greater dependence on competition the internet raises new issues but there also competition will play an important regulatory role

factor price changes technical efficiency and revenue requirements regulation a regulatory framework is considered in which output price adjustments can be initiated only by a change in the price of a non capital input e g fuel at some time in the future which is uncertain at that time there is a processing period and then an adjustment of the output price so that the revenues of the firm meet an allowed rate of return s the regulated firm choosing a putty clay technology is shown to overcapitalize for large values of s and to undercapitalize for sufficiently small values of s a decrease in the length of the processing period is found to accentuate the extent of either the undercapitalization or overcapitalization resulting from the specified rate of return

time of use pricing for load management programs in taiwan power company load management programs have been actively performed by the utilities to reduce peak demand and improve system load factor in recent years the time of use tou tariff based on the peak load pricing theory has been one of the most effective load management strategies proper tou rate structure can actually reflect the generation cost of electricity supplying and give a guideline for customers to modify the power consumption pattern so that the system load factor can be improved the inverse electricity pricing rule can be applied as the basis of tou pricing in this paper the price elasticities of industrial customers of taipower system are solved by the statistical regression model with 2620 data samples

regulation and industrial organization this paper examines the effects on firm behavior and industry structure of industry wide price regulation by the state such regulation wherein regulators set prices with regard to an industry wide aggregate performance measure has been and still is widely used and is shown to induce inefficiencies in firm operation in general such regulation can result in setting prices high enough to maintain inefficient firms and it encourages to inefficient firm operation due to incentives to inflate costs and averch johnson effects

how strong are weak patents economists usually conceive of patents as property rights that prevent others from practicing the patenting technology unless they first obtain a license from the patent holder even for ironclad patents i e for patents that are certain to be valid the existing literature has shown that the analysis of equilibrium licensing contracts is surprising subtle and complex 1 for example the analysis is quite different depending upon whether one firm s licensing contract is observable to the other firms likewise equilibrium outcomes are quite different if royalties must be linear than in the case where two part tariffs and other non linear royalties are permitted in that literature a downstream firm that refuses to sign a contract with the upstream supplier either exits the industry in the case that the upstream supplier controls an essential input or must rely on more costly inputs in the case of a non essential input in other words the downstream firm s threat point is to use some backstop technology in practice however patents are issued after a brief examination by the patent office to see if they meet the statutory requirements for novelty and non obviousness mounting evidence indicates that many weak patents i e patents unlikely to be found valid if challenged in court are issued by the u s patent and trademark office uspto 2 some observers view this with great alarm arguing that uspto is handing out undeserved monopolies others by contrast have suggested that these weak patents are of little concern because they will have little commercial impact because they will be licensed at commensurately low royalty rates or not enforced at all we study the commercial impact of weak patents more precisely we define a patent s strength as the probability that it will be found valid if challenged in court and we examine the relationship between a patent s strength and the royalties that it can command the distinctive

regulator heterogeneity and endogenous efforts to close the information asymmetry gap abstract the now standard principal agent model of regulator firm interactions typically assumes the presence of a single regulator and an exogenously determined information asymmetry between the principal and the agent in this paper we draw upon a unique data set of regulatory inspections conducted by the u s food and drug administration fda to explore the consistency of these assumptions with the actual practice of regulators we find that the canonical assumptions of the agency paradigm are strained by if not altogether inconsistent with the key practical realities of regulation by the fda our analysis uncovers several dimensions along which regulators actively and endogenously seek to close the information asymmetry gap we also find considerable regulator heterogeneity which in turn depends in part upon the specific training and experience of individual regulators

efficient regulation with little information reality in the limit we present a regulatory scheme that converges to ramsey pricing and productive efficiency even if regulators have little information about technology or demand the model has firms selecting prices subject to the regulator s requirement that the firm earn a fair return on capital at today s capital stock and output levels regulators then review later performance and are more likely to request new rate hearings as the firm s return deviates more from the fair return as long as regulators do not review negative returns too fast relative to positive returns these conditions are sufficient for convergence to ramsey prices and productive efficiency public utility regulators generally set prices not rates of return per se these prices however often are meant to achieve approximately some target rate of return but when projecting how prices will affect rates of return regulators are often at the mercy of the firms for economic projections about the effects of various price vectors e g across customer classes upon profits so if realized rates of return deviate from targets regulators may call new rate hearings and they may expedite these hearings if the deviations are large 2 by formalizing these real world observations some rather surprising efficiency results appear suppose that regulators have no knowledge of demands and technologies but can observe past realizations of prices and quantities if the review probabilities are as noted above and satisfy an asymmetry condition then this regulatory process may converge not only to productive efficiency overcoming averch johnson over capitalization effects but to ramsey prices these conclusions are derived from unifying and extending work by bawa and sibley 1980 and vogelsang and finsinger 1979

regulated equity returns a puzzle abstract based on a database of u s electric utility rate cases spanning nearly four decades the returns on equity authorized by regulators have exhibited a large and growing premium over the riskless rate of return this growing premium does not appear to be explained by traditional asset pricing models often in direct contrast to regulators stated intent we suggest possible alternative explanations drawn from finance public policy public choice and the behavioral economics literature however absent some normative justification for this premium it would appear that regulators are authorizing excessive returns on equity to utility investors and that these excess returns translate into tangible profits for utility firms

the multiproduct firm quality choice and regulation a monopolist facing a market of heterogeneous consumers will distort the quality a rray this paper explores three regulatory remedies minimum quality s tandards mqs maximum price regulation mpr and rate of return re gulation rorr that can counteract this distortion mqs and mpr rais e the quality offered to consumers with a low willingness to pay for quality while mqs have no effect on the quality offered to consumers with a high willingness to pay mpr decreases the quality offered to this group if production of high low quality goods is capital i ntensive rorr increases decreases the quality offered to both grou ps copyright 1988 by blackwell publishing ltd

dynamics of rate of return regulation under rate of return regulation a firm s product prices are constrained by the requirement that investors not earn more than an allowable return on the firm s assets this paper examines the dynamic properties of the rate of return regulation process when the regulated firm periodically undertakes new capacity investments our analysis identifies prices that correspond to stationary values of the regulation process it is shown that the underlying depreciation rules for property plant and equipment determine whether these stationary prices will be above equal to or below the long run marginal cost of providing the regulated service we provide conditions under which the rate of return regulation process is dynamically stable so that prices indeed converge to their stationary values the overall efficiency of this regulation method is shown to depend on how well the applicable depreciation schedule matches the productivity pattern of the assets in use this paper was accepted by gerard p cachon accounting

the equity and efficiency of two part tariffs in u s natural gas markets abstractresidential natural gas customers in the united states face volumetric charges that average about 30 percent more than the marginal cost of gas this inefficient departure from marginal cost pricing allows gas utilities to cover their fixed infrastructure and operating costs proposals for recovering these costs instead through fixed monthly fees are often opposed because of a widespread belief that current rate schedules have desirable distributional consequences using nationally representative household level data we show that the correlation between household income and natural gas consumption is indeed positive but surprisingly weak so current rate schedules are only mildly progressive in part we argue that this is because poor households tend to have larger families and less energy efficient homes we calculate bill impacts under a variety of scenarios and show that even a modest energy assistance program would more than offset the distributional impact of tariff rebalancing for most low

pricing efficiency under rate of return regulation some empirical evidence for the electric utility industry the authors test quasi optimal pricing rules for rate of return regulation for a sample of electric utilities they estimate the regulated cost function and demand equations by class of customer for the sample to yield the cost and demand parameters required to assess the utility rate structures the results indicate that the price structure of electricity by class of customer is not quasi optimal and that welfare improvement might be possible under alternative prices searching for the price structure which satisfies the criteria they find that commercial users rates have been too high relative to residential and to a lesser extent industrial rates they note that commercial uses tend to be less organized and more poorly represented in the rate making process 16 references 8 tables

regulatory and life cycle influences on managerial incentives an important controversy persists in economics concerning the appropriateness of profit maximization as opposed to various competing nontraditional theories of the firm 13 of particular interest has been the comparative relevance of the sales maximization hypothesis suggested by baumol 4 and others a typical methodology employed to empirically analyze the profit versus sales maximization issue has been to question whether the financial rewards of top executives are more strongly influenced by corporate profit or sales performance it is implicitly assumed that the firm has a well defined set of organizational goals and that the structure of executive compensation is designed to provide executives with a consistent set of incentives therefore should profit performance constitute a significant determinant of executive compensation support for the profit maximization hypothesis would be gained on the other hand if executive compensation is closely related to firm sales then the nontraditional sales maximization hypothesis would be supported in an early empirical analysis of the issue mcguire chiu and elbing 14 found that sales and compensation were more highly correlated than were profits and compensation and therefore that the baumol hypothesis seemed most relevant lewellen and huntsman 12 pointed out however that mcguire et al had neglected to consider the deferred and contingent stock options etc elements of executive compensation and in so doing had perhaps biased their analysis against the profit maximization hypothesis by correctly considering the impact of corporate performance on the total compensation of top corporate executives lewellen and huntsman found strong support for the profit maximization hypothesis and no support for sales maximization in fact so convincing were the lewellen and huntsman results that they seemed to resolve the managerial motivation issue in favor of the traditional profit maximization model more recent empirical analyses however have tended to suggest that the issue is far from resolved baker 3 boyes and schlagenhauf 5 and ciscel and carroll 6 have all

u s industry adjustment to economic deregulation conomic deregulation does not happen overnight it takes time for lawmakers and regulators to dismantle regulatory regimes and then it takes more time for the deregulated industries to adjust to their new competitive environment federal regulatory agencies and the u s congress began liberalizing pricing entry and exit in the transportation financial energy and communications industries during the mid 1970s but while some smaller industries such as intercity bus transportation and air cargo have been fully deregulated during that time the only major american industries fully deregulated to date are airlines and motor carriers as to the pace of industry adjustment consider airlines economic deregulation of the airline industry began in 1974 when the civil aeronautics board first encouraged experiments with discount fares it was completed in 1983 when all regulations on fares entry and exit were eliminated yet more than 20 years after the deregulatory process began the airline industry continues to shed inefficiencies that accumulated over decades of regulation and to find new ways to market their service indeed the airlines latest marketing innovation selling discount fares on the internet would be illegal if fares were still regulated it is not surprising that deregulated or partially deregulated industries are slow to achieve maximum efficiency when regulatory restrictions on pricing operations and entry especially from new firms have been enforced for decades managers and employees of regulated firms settle into patterns of inefficient production and missed opportunities for technological advance and entry into new markets deregulation frees an industry from the state s control over prices entry and exit although of course firms are still subject to antitrust laws and safety regulations after deregulation some costs usually fall in short order but it takes

regulatory restructuring and incumbent price dynamics the case of u s local telephone markets prior to the telecommunications act of 1996 many u s states restructured their regulatory framework by replacing rate of return regulation with competition in both the local exchange service and local long distance markets and adopting price regulation price caps and price freezes using a panel data set of incumbent firm prices for three services i investigate whether price regulation and differences in entry conditions affect incumbent operators rate structures i find that competition has prompted a significant amount of rate rebalancing by reducing the amount of cross subsidization present in local telephone markets in addition the added flexibility of price cap regulation speeds the rate rebalance effects of competition

the impact of economic regulation on attempts to curb expense preference behavior a micro data analysis of ceo compensation schemes for electric utilities this study uses a large micro data set to present evidence which suggests that owners of regulated electric utilities have little incentive to structure ceo compensation packages in an effort to curb potential expense preference behavior because such potential behavior occurs or would occur at no cost to the firm or the firm s owners little incentive exists to structure compensation schemes in a way that would curb such behavior e g by compensating them with incentive bonus plans and stock options the results presented here augment those which examine other industries e g banking in an effort to point out the relationships between ownership organization political involvement and expense preference behavior

product complementarities capabilities and governance a dynamic transaction cost perspective the organization and governance of the transactions that comprise a bundling arrangement depend on the distribution of capabilities among firms and the amount of time during which the window of opportunity for earning rents is expected to remain open firms engaged in inter firm collaboration must undertake support transactions related to billing marketing customer support and product repair these support transactions differ from the core transactions that have traditionally been perceived as sufficient to provide a product bundle since support transactions create costs of their own the market may turn out to be an expensive means of governing collaborative arrangements undertaken for bundling purposes the telecommunications service sector provides an illustration copyright 1997 by oxford university press

regulatory lag and deregulation with imperfectly adjustable capital abstract the dynamic effects of regularity lag and deregulation on the behavior of a firm with imperfectly adjustable capital are examined given adjustment costs and irreversible investment the firm reacts in advance to anticipated changes in regulation in the regulatory lag case capital increases after regulation is imposed the averch johnson effect is observed before regulation but not necessarily afterwards sufficient conditions are given for the capital bias to increase the regulated firm may choose inputs reflecting either a labor or capital bias in anticipation of deregulation sufficient conditions are given for the capital bias to be lessened by deregulation

transition pathways for a uk low carbon electricity future abstract achieving long term targets for greenhouse gas emissions reductions such as the uk s legally binding target of reducing its emissions by 80 by 2050 will require a transition in systems for meeting and shaping energy service demands involving radical substitution to low carbon supply technologies and improvements in end use energy efficiency this paper describes the development and high level analysis of a set of transition pathways to a uk low carbon electricity system explaining key features of the core pathways developed and the distinctiveness and value of the approach the pathways use an action space concept to explore the dynamic interactions between choices made by actors which are influenced by the competing governance framings or logics that different actors pursue the paper sets out three core transition pathways market rules central co ordination and thousand flowers in which market government and civil society logics respectively dominate it summarises the key technological and institutional changes in these pathways and the roles of actors in bringing these about this leads to an identification of the key risks to the realisation of each of the pathways and of the challenges for individuals businesses social movements and policy makers in taking action to bring them about and sustain them

an examination of the effect of ownership on the relative efficiency of public and private water utilities the behavior of privately and publicly owned water utilities is examined by estimating a generalized variable cost function containing the regular characteristics of the neoclassical cost function without requiring that cost minimization subject to market prices be imposed as a maintained hypothesis assuming that unobserved shadow prices reflect the regulatory environment of the water industry tests for cost minimization are obtained by deriving shadow prices as functions of market prices the empirical results provide evidence that public water utilities are more efficient than private utilities on average but are more widely dispersed between best and worst practice

a note on allowed and realized rates of return of the us electric utility industry most empirical investigations of electric utility behavior use the realized rate of return as a proxy for the allowed rate of return we examine the validity of this assumption and investigate the relationship of the allowed and realized rates to the cost of capital between 1973 and 1982 we use two measures of the cost of capital one based on returns to book equity the other derived from a market price of equity while realized and allowed rates were generally higher than the book measure throughout the period both of the rates of return were less than the market price of capital after 1979 we also find firms did not earn their allowed rate of return after 1974 therefore the use of the realized rate as a proxy for the allowed rate in empirical models will lead to biased parameter estimates to help correct this bias we give data for allowed rates

synergies and trade offs between governance and costs in electricity system transition affordability and costs of an energy transition are often viewed as the most influential drivers conversely multi level transitions theory argues that governance and the choices of key actors such as energy companies government and civil society drive the transition not only on the basis of costs this paper combines the two approaches and presents a cost appraisal of the uk transition to a low carbon electricity system under alternate governance logics a novel approach is used that links qualitative governance narratives with quantitative transition pathways electricity system scenarios and their appraisal the results contrast the dominant market led transition pathway market rules with alternate pathways that have either stronger governmental control elements central co ordination or bottom up proactive engagement of civil society thousand flowers market rules has the lowest investment costs by 2050 central co ordination is more likely to deliver the energy policy goals and possibly even a synergistic reduction in the total system costs if policies can be enacted and maintained thousand flowers which envisions wider participation of the society comes at the expense of higher investment and total system costs the paper closes with a discussion of the policy implications from cost drivers and the roles of market government and society