ON THE RELATIVE PERFORMANCE OF ALTERNATIVE REGULATORY INSTRUMENTS FORCONSTRAINING A FIRMS PROFITABILITY

The issue addressed in this paper is whether certain types of regulato ry instruments perform better than others when the regulator's objecti ve is simply to restrain the regulated firm's profitability. Price cap , profit cap, profit/sales and mark-up-on-average cost caps are consid ered as regulatory instruments, whilst expense preference, profits, an d sales revenues are considered as potential arguments in the firm's o bjective function. The main finding is that, for the range of objectiv e functions considered, the price cap leads to the best outcome from a n economic welfare standpoint.