Myopic Firm Behavior Thwarting Intent of Average-Revenue-Lagged Regulation

Abstract

Recent papers have demonstrated that Average-Revenue-Lagged regulation(ARL) as applied to the single-product / multi-market firm is susceptible to strategicmanipulation even leading to global profit maximum pricing. This paper illustrates thatmyopic behavior within ARL under appropriate conditions on product demands andproduction costs can also produce profit maximum prices thus undermining obviousregulatory intent. The possibility of this outcome is another significant criticism that maybe leveled against this particular regulatory approach. (L43, L51)