The Pricing Dynamics of Utilities With Underdeveloped Networks

28 Pages Posted: 20 Apr 2016

Date Written: April 1, 2007

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.

Keywords: Economic Theory & Research, Markets and Market Access, Urban Water Supply and Sanitation, Infrastructure Regulation, Access to Markets

Suggested Citation

Chisari, Omar and Kessides, Ioannis N. and Kessides, Ioannis N., The Pricing Dynamics of Utilities With Underdeveloped Networks (April 1, 2007). World Bank Policy Research Working Paper No. 4198, Available at SSRN: https://ssrn.com/abstract=979670

Omar Chisari (Contact Author)

The World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Ioannis N. Kessides

World Bank

1818 H Street N.W.
Washington, DC 20433
United States

World Bank

1818 H Street N.W.
Washington, DC 20433
United States

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