The pricing dynamics of utilities with underdeveloped networks, Vol. 1 of 1

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The pricing dynamics of utilities with underdeveloped networks

Author:	Chisari, Omar O.; Kessides, Ioannis N.;	Collection Title:	Policy, Research working paper ; no. WPS 4198
Country:	World;	Date Stored:	2007/04/09
Document Date:	2007/04/01	Document Type:	Policy Research Working Paper
Language:	English	Region:	The World Region
Report Number:	WPS4198	SubTopics:	Urban Water Supply and Sanitation; Infrastructure Regulation; Economic Theory & Research; Markets and Market Access; Access to Markets
Volume No:	1 of 1

Summary: 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.


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