Why Regulate Prices? Some Notes on the Price Cap Methods

We consider some recent criticisms of price cap methods of regulation, and suggest that many theoretical arguments, based on the so-called Bayesian approach, do not in fact point to practicable alternatives. We then investigate the use of simple and verifiable quantity regulatory methods, i.e. output floors. We find that they may lack of credibility. Moreover, in the prominent case of a multi-product regulated firm, they do not appear to improve the known desirable welfare properties of price caps. As a preliminary conclusion, we retain the opinion that price caps still stand as a sound regulatory method.