TY  - JOUR
AU  - Bernstein,Jeffrey I.
AU  - Sappington,David E. M.
TI  - Setting the X Factor in Price Cap Regulation Plans
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6622
PY  - 1998
Y2  - June 1998
UR  - http://www.nber.org/papers/w6622
L1  - http://www.nber.org/papers/w6622.pdf
N1  - Author contact info:
Jeffrey I. Bernstein
Department of Economics
University Park Campus
Florida International University
11200 S.W. 8th Street
Miami, FL 33199
Tel: 305/348-2592
E-Mail: jeffrey.bernstein@fiu.edu
AB  - Despite the popularity of price cap regulation in practice, the economic literature provides relatively little guidance on how to determine the X factor, which is the rate at which inflation -adjusted output prices must fall under price cap plans.  We review the standard principles that inform the choice of the X factor, and then consider important extensions.  We analyze appropriate modifications of the X factor: (1) when only a subset of the firm's products are subject to price cap regulation, and when product-specific costs and productivity cannot be measured; (2) when the pricing decisions of the regulated firm affect the economy-wide inflation rate; and (3) in the presence of structural changes in the industry, such as a strengthening of competitive forces.
ER  -