Maximum price regulation

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The maximum price regulation , in English called price-cap regulation, is a method of regulating natural monopolies . It is often preferred to classic regulatory instruments because it is considered to be comparatively simple, transparent and easy to implement.

Background / story

The maximum price regulation goes back to the British economist Stephen Littelchild . In 1982 the British Department of Industry commissioned him to develop a modified concept of the rate-of-return regulation that was conventional at the time . For Littlechild, the main points of criticism were the Averch-Johnson effect of the incentive distortion and the enormous administrative effort involved in implementation. Littlechild pointed out in his report the lack of options for systematic rate-of-return regulation, as this is always applied to an entire company, but not specifically to those areas of production in which there is monopoly power.

At first it was not foreseeable what triumphant advance the maximum price regulation would take. As it was a simple, transitively constructed regulatory instrument, it was soon used in Great Britain in sectors other than the local telecommunications networks originally planned. It found application in other privatized network sectors such as gas and electricity, water, railways and airports.

Economic basics

Basic concept

The idea of ​​maximum price regulation is based on the idea that there cannot be a perfect regulatory instrument and that regulation does not guarantee a perfect correction of a market failure . The regulation is limited to monopolistic services in implementing the simplicity and the practical implementation of great importance be metered. Basically, the price level of the monopolistic service should not rise higher than the inflation rate . Customers should be able to request the same goods in a basket of services at today's prices as in the previous period without incurring additional expenses.

Incentive regulation

Conventional regulatory instruments usually require the regulatory authorities to obtain a high level of information. Maximum price regulation circumvents this problem by allowing output price changes that are related to changes in the consumer price index and productivity in the sector to be regulated. The prices are assumed to be known and the change in the consumer price index and productivity are understood as exogenous . As a result, detailed information on the regulated company's cost and demand conditions is not required, and principal-agent problems are largely avoided.

Limiting the output prices not only reduces the regulatory effort, it also creates business incentives in the search for cost savings and new, more innovative price structures . For companies, this means more room to set prices than with other regulatory measures.

Application examples

The maximum price regulation is used in monopolistic bottleneck areas in order to discipline the remaining market power there. In Germany this affects various industries in which there are natural monopolies . The telecommunications industry is regarded as a pioneer in Germany , where the method was first used in 1998.

Today, the price cap regulation is used in areas such as the postal sector , the energy sector and the railroad sector.


  • Knieps, G. (2008). Competitive economy. Heidelberg: Springer-Verlag Berlin Heidelberg.
  • Knieps, G. (October 2009). Theory and Practice of Price Cap Regulation. Institute for Transport Science and Regional Policy .
  • Olten, R. (1995). Competition theory and competition policy. Munich: Oldenbourgh Verlag GmbH.
  • Stern, J. (2003). What the Littelchild Report actually said. London: London Business School & NERA.

Web links

Federal Network Agency. (2016). Retrieved on December 1, 2016 from

Individual evidence

  1. Olten, Rainer: Competition theory and competition policy . Oldenbourg Verlag GmbH, Munich 1995, ISBN 3-486-22775-0 , p. 154 ff .
  2. a b Knieps, Günter: Theory and Practice of Price Cap Regulation . In: Institute for Transport Science and Regional Policy University of Freiburg (Ed.): Contribution to the discussion Institute for Transport Science and Regional Policy . No. 127 , October 2009, p. 9 f .
  3. a b c d Knieps, Günter: Competitive economy . 3. Edition. Springer-Verlag Berlin Heidelberg, Heidelberg 2008, ISBN 978-3-540-78348-0 , p. 109 f .
  4. Stern, Jon: What the Littelchild Report actually said . Ed .: London Business School & NERA. London 2003, p. 23 ff .
  5. Federal Network Agency. Retrieved November 28, 2016 .