Publication: The Pricing Dynamics of Utilities with Underdeveloped Networks
Date
2007-04
ISSN
Published
2007-04
Author(s)
Chisari, Omar O.
Kessides, Ioannis N.
Abstract
This paper uses an analytically
tractable intertemporal framework for analyzing the dynamic
pricing of a utility with an underdeveloped network (a
typical case in most developing countries) facing a
competitive fringe, short-run network adjustment costs,
theft of service, and the threat of a retaliatory regulatory
review that is increasing with the price it charges. This
simple dynamic optimization model yields a number of
powerful policy insights and conclusions. Under a variety of
plausible assumptions (in the context of developing
countries) the utility will find its long-run profits
enhanced if it exercises restraint in the early stages of
network development by holding price below the limit defined
by the unit costs of the fringe. The utility's optimal
price gradually converges toward the limit price as its
network expands. Moreover, when the utility is threatened
with retaliatory regulatory intervention, it will generally
have incentives to restrain its pricing behavior. These
findings have important implications for the design of
post-privatization regulatory governance in developing countries.
Citation
“Chisari, Omar O.; Kessides, Ioannis N.. 2007. The Pricing Dynamics of Utilities with Underdeveloped Networks. Policy Research Working Paper; No. 4198. © World Bank, Washington, DC. http://openknowledge.worldbank.org/entities/publication/634bafff-59e8-543c-8a43-2f51178a6553 License: CC BY 3.0 IGO.”
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