The Price-Iso Return Locus and Rational Rate Regulation
Volume: Volume 10, No. 2
Issue: Autumn 1979
Pages: pp. 648-658
Authors: William J. Baumol, Dietrich Fischer, and Thijs ten Raa
Title: The Price-Iso Return Locus and Rational Rate Regulation
Abstract: The price-iso return locus for a regulated multiproduct firm shows all price vectors giving the rate of return permitted by regulation. The locus for any two products is shown to have both negatively and positively sloping segments. A price vector on a positively sloped segment is socially inefficient, because both prices can be cut without reducing rate of return. Yet, regulatory policy may force firms into such parts of the locus. Other significant properties of the locus are derived, including the relation of its shape to demand elasticities and its implications for cross subsidy and for Ramsey optimality.
JEL Classification
Microeconomics Theory of Production (0223)
Regulation of Public Utilities (6130)