Against the background that a combination of price-cap and minimum quality regulation is socially optimal but hard to implement, the aim of this paper is to develop an alternative optimal regulatory mechanism that involves lower administrative costs. In a modelling Framework that adequately describes the behaviour of market participants in network industries, we found that return-on-cost regulation has (approximately) the same effects on price, quality and welfare as minimum quality regulation. If it is the aim of the regulator to achieve the welfare maximum under the zero profit constraint, we show that a combination of price-cap and return-on-cost regulation leads arbitrarily close to this point and can thus be applied instead of price-cap plus minimum quality regulation.
Minimum quality standard, monopoly regulation, network industry
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