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Demand Uncertainty and the Regulated Firm

Braeutigam, Ronald R. and Quirk, James P. (1979) Demand Uncertainty and the Regulated Firm. Social Science Working Paper, 261. California Institute of Technology , Pasadena, CA.

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Demand uncertainty is an important element of many regulated markets. Firms often must select plant size before actual demand is observed, and with some expectation of regulatory action if the actual levels of profit or rate of return do not fall within accepted ranges. We analyze a model of a regulated firm that faces a relatively complex regime of price regulation, reflecting to at least some extent the multiple aspects suggested by Joskow (1974). The firm behaves as though it expects the current tariff to remain in effect unless, at the actual demand observed after plant size is chosen, one of two things occurs. First, if profits are negative, the firm plans to petition for and expects to receive a new tariff yielding zero economic profits. Second, if the rate of return on capital exceeds some specified maximum, the firm expects the regulator to reduce the tariff so that the firm earns only that maximum.

Item Type:Report or Paper (Working Paper)
Related URLs:
URLURL TypeDescription ItemLater version published in International Economic Review
Additional Information:This research was supported in part under a DOE grant, EY-76-G-03-1305, EQL Block. We also want to thank the Environmental Quality Laboratory at California Institute of Technology for its help and assistance in this research. Published as Braeutigam, Ronald R., and James P. Quirk. "Demand uncertainty and the regulated firm." International Economic Review (1984): 45-60.
Group:Social Science Working Papers
Funding AgencyGrant Number
Department of Energy (DOE)EY-76-G-03-1305
Subject Keywords:Demand, Commercial regulation, Capital costs, Market prices, Economic uncertainty, Price regulation, Density distributions, Investment return rates, Operating costs, Average cost
Series Name:Social Science Working Paper
Issue or Number:261
Record Number:CaltechAUTHORS:20171017-144203932
Persistent URL:
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:82431
Deposited By: Jacquelyn Bussone
Deposited On:18 Oct 2017 22:23
Last Modified:03 Oct 2019 18:54

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