Price-cap regulation and technical change

Anthony G. Heyes*, Catherine Liston-Heyes

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

4 Citations (Scopus)


Existing analyses of the implications of price-cap regulation for the development of cost-reducing technologies assume that all R&D is done by the regulated industry. This is unrealistic. We present a simple model of non-cooperative R&D by a regulated firm and a single 'external' developer under a price-cap regime of the sort characterised by Cabral and Riordan. In equilibrium the external developer exerts less R&D than is socially optimal, the regulated firm may exert more or less. A 'tightening' of the regulatory regime impacts the R&D incentives of both players, though in different ways. The optimal regulatory-adjustment parameter may be bigger or smaller than that suggested by existing studies. Despite the scope for duplication of results, research by an outsider necessarily enhances welfare.

Original languageEnglish
Pages (from-to)137-151
Number of pages15
JournalJournal of Public Economics
Issue number1
Publication statusPublished - 1 Apr 1998


  • Cost-reducing technologies
  • Monopolies
  • Price-cap regulation
  • Technical change

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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