Abstract
This chapter focuses on price-cap regulation. The US Federal Communications Commission, FCC proposed replacing rate-of-return regulation with price-cap regulation in the market for local and long-distance telephone service. Price caps are typically applied only to prices for monopolistically supplied goods. A separate price cap can be defined for every single good in monopolistic supply. If the index m denotes monopolistically supplied goods, a profit-maximizing firm faces constraints where the price ceilings are set by the regulator and the firm can choose any price up to the limit. However, the flexibility of the regulated firm can be greatly enhanced if a joint price ceiling is defined for a basket of services supplied by the firm. The best-known example of such a joint ceiling is the RPI–X regulation; an average price of some bundle of the firm's products must not exceed the retail price index minus an exogenously fixed constant X. This form of price regulation has been proposed by Littlechild and is the basis for the regulation of, among others, British Telecom, British Gas, and the UK public electricity suppliers.
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