Inducing Optimal Quality Under Price Caps: Why, How, and Whether
Quality of postal service is of concern around the world, and was a subject of proceedings in the US to assess the performance of price-cap regulation (PCR) of “market-dominant” services. Although PCR does not imply minimizing quality, work by Sappington implies that quality will be below the optimal level at the regulated price. Mechanisms to get regulated firms to internalize this quality externality, consistent with information limitations justifying PCR, provide no benefits to postal customers. Negotiated arrangements between a postal operator and its regulator to set and incentivize quality of service are likely the best available option.
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