Writing Resources
In contrast to the rate of return regulation price cap regulation should not establish prices to determine a given level of profitability Instead a price ceiling is established and the profitability of the firm then depends on the extent to which it is able to keep its costs below the determined maximum revenue under the cap Jones 2003 Initially the price cap can be set in such a way that forecasts revenue will just cover the forecast operating and capital costs for the period to which the cap applies the firm may then reduce these costs while providing the agreed quality and quantity of service and thereby raise its profits Parker and Kirkpatrick 2005 Price cap regulation, therefore, encourages productive efficiency and consequently is often referred to as incentive regulation
