We argue that some forms of market-based regulation allowed within current statutory constraints can outperform traditional rate-setting regulation now used for interstate natural gas pipelines. In particular, a resale market for pipeline capacity rights can yield efficient choices in the short...

Price caps, while widely touted, are less commonly implemented. Most incentive schemes involve profit sharing and are thus variants of sliding-scale regulation. I show that, relative to price caps, some degree of profit sharing always increases expected welfare. Numerical simulations show that...

This paper compares the performance of two prominent non-Bayesian regulatory mechanisms: Sappington and Sibley's (1988) Incremental Surplus Subsidy (ISS) and Hagerman's (1990) refinement of the Vogelsang-Finsinger (1979) mechanism. The two mechanisms are shown to induce identical, non-zero...

We extend the economic theory of regulation to allow for strategic self-regulation that preempts political action. When political "entry" is costly for consumers, firms can deter it through voluntary restraints. Unlike standard entry models, deterrence is achieved by overinvesting to raise the...

In many markets governments set minimum quality standards while some sellers choose to compete on the basis of quality by exceeding them. Such ‘high-quality’ strategies often win public acclaim, especially when ‘environmental friendliness’ is the dimension along which firms are...

Long-term contracts often include most-favored-nation clauses (MFNs), which are nondiscrimination guarantees that obligate a buyer or seller to treat all trading partners symmetrically in pricing decisions. Recent theoretical work has shown that such clauses can facilitate tacit collusion by...

Regulation is often thought to discourage innovation. This problem is not evidenced by electric utility behavior up through the mid-1970s, during which time utilities adopted various new generation technologies. However, retrospective "prudence" reviews, common since the 1980s, may discourage...

Since the emergence of a spot market in natural gas in 1984, state regulators have been concerned that regulated utilities would fail to choose between contracts and spot purchases in a way that minimizes costs. Grounds for this concern are shown, under two alternative rate structures, in a...