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Regulating Prices to Equal Forward-Looking Costs: Cost-Based Prices or Price-Based Costs?

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Abstract

This article defines "forward-looking cost," identifies conditions under which forward-looking costs can be calculated, and explains the relationship among forward-looking costs, depreciation and utilization. It derives a framework to account for the risk of asset death, changes in the cost of new capital, demand growth and uncertainty, and competition risk. The potential for competition, asset life uncertainty, and the installation of excess capacity in anticipation of demand growth raise forward-looking cost. The potential for technological change that enhances the future value of an asset lowers forward-looking cost.

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  1. School of Management, Boston University, 595 Commonwealth Avenue, Boston, MA, 02215

    Michael A. Salinger

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  1. Michael A. Salinger
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Salinger, M.A. Regulating Prices to Equal Forward-Looking Costs: Cost-Based Prices or Price-Based Costs?. Journal of Regulatory Economics 14, 149–164 (1998). https://doi.org/10.1023/A:1008057218273

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  • DOI: https://doi.org/10.1023/A:1008057218273

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