Quality Variation When Prices Are Regulated
Volume: Volume 3, No. 2
Issue: Autumn 1972
Pages: pp. 425-436
Authors: Lawrence J. White
Title: Quality Variation When Prices Are Regulated
Abstract: Quality has been a neglected area of public utility regulation analysis. Many authors are uneasy about the quality levels that result from regulation but they frequently can only conclude that "it is uncertain whether consumers found this quality to be worth the price they paid."
This paper includes a quality variable in a simple model of competition and monopoly under price regulation. Competitors compete away any potential revenue above the cost of the basic output by offering higher quality; a monopolist chooses the profit maximizing quality level. Some important conclusions are as follows: (1) A regulated competitive industry will offer more quality per unit of basic output than will an equally regulated monopolist; (2) the competitor's quality offerings will vary directly with the regulated price; (3) regulation induces a uniformity of quality offerings, whereas an unregulated industry would offer a variety; and (4) virtually all consumers must be worse off when a competitive industry is regulated, because they lose quality choice. If a separate unregulated price can be charged for quality, results comparable to an unregulated industry may be achieved.