Scandinavian Working Papers in Business Administration

FE rapport,
University of Gothenburg, Department of Business Administration

No 2005-407: Incitamentsreglering av monopol med styckvis linjär approximation av efterfrågan

Björn Lantz ()
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Björn Lantz: Department of Business Administration, School of Economics and Commercial Law, Göteborg University, Postal: Box 640, SE 405 30 Göteborg, Sweden

Abstract: One anonymous mechanism for monopoly regulation is the Chord-approximation Adjustment Process, CAP, suggested by Vogelsang (1988) where the change in consumer surplus is approximated as an average between a Laspeyres and a Paasche index. The main drawback of this method is an incentive for strategic pricing behaviour so that the price will not converge to marginal cost whenever demand is not linear. This paper shows how the change in consumer surplus under a non-linear demand curve can be approximated piecewise linearly based on solely verifiable information which removes the incentive for strategic behaviour.

Keywords: Monopoly regulation; incentive regulation

15 pages, March 29, 2005

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