The Pricing Dynamics of Utilities with Underdeveloped Networks
This paper uses an analytically
tractable intertemporal framework for analyzing the dynamic
pricing of a utility with an underdeveloped network (a
typical case in most developing countries) facing a
competitive fringe, short-run network adjustment costs,
theft of service, and the threat of a retaliatory regulatory
review that is increasing with the price it charges. This
simple dynamic optimization model yields a number of
powerful policy insights and conclusions. Under a variety of
plausible assumptions (in the context of developing
countries) the utility will find its long-run profits
enhanced if it exercises restraint in the early stages of
network development by holding price below the limit defined
by the unit costs of the fringe. The utility's optimal
price gradually converges toward the limit price as its
network expands. Moreover, when the utility is threatened
with retaliatory regulatory intervention, it will generally
have incentives to restrain its pricing behavior. These
findings have important implications for the design of
post-privatization regulatory governance in developing countries.
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Bibliographic Details
| Main Authors: |
Chisari, Omar O.,
Kessides, Ioannis N. |
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| Language: | English |
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| Published: |
World Bank, Washington, DC
2007-04
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| Subjects: | BENCHMARK,
BENCHMARK LEVEL,
BENCHMARKS,
COMPETITIVE FRINGE,
CONNECTIONS,
CONSUMERS,
DEMAND FUNCTION,
DISCOUNT RATE,
DISECONOMIES OF SCALE,
DIVIDENDS,
ECONOMIC EFFICIENCY,
ELECTRICITY PRODUCTION,
ELECTRICITY SECTOR,
EXTERNALITIES,
FIXED COSTS,
INCREASING RETURNS,
INFRASTRUCTURE INDUSTRIES,
INFRASTRUCTURE SERVICES,
LOW TARIFFS,
MARGINAL COST,
MARGINAL COSTS,
MARKET STRUCTURE,
MARKET VALUE,
MONOPOLY,
OPTIMIZATION,
POTENTIAL DEMAND,
PRICE CONTROLS,
PRICE INCREASE,
PRICE INCREASES,
PRICE LEVEL,
PRICE LEVELS,
PRICING POLICY,
PRIVATIZATION,
PRODUCT DIFFERENTIATION,
PRODUCTION FUNCTION,
PROFIT MAXIMIZATION,
PUBLIC UTILITY,
PUBLIC WATER,
PUBLIC WATER UTILITY,
REGULATORS,
REGULATORY AGENCIES,
REGULATORY GOVERNANCE,
REGULATORY INTERVENTION,
REGULATORY MECHANISMS,
REGULATORY POLICY,
REGULATORY REGIMES,
REGULATORY REVIEW,
REGULATORY ¯ INTERVENTION,
REGULATORY ¯ ¯ INTERVENTION,
SERVICE PROVIDERS,
SHADOW PRICE,
SHADOW PRICES,
STATIC ANALYSIS,
UNIT COST,
URBAN AREAS,
URBAN COMMUNITIES,
UTILITIES,
UTILITY NETWORKS,
VARIABLE COST,
WATER SUPPLY,
WATER VENDORS, |
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| Online Access: | http://documents.worldbank.org/curated/en/2007/04/7524414/pricing-dynamics-utilities-underdeveloped-networks
https://hdl.handle.net/10986/7027
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