Yukihiro Kidokoro

Rate of return regulation and rate base valuation

Abstract We analyze the rate of return (ROR) regulation that values a firms assets at their book values, and decompose its effects into three components: the Averch–Johnson (AJ) effect, the capital-gains effect, and the book-valuation effect. We show that the book-valuation effect can upset the AJ effect to cause an underinvestment in capital. We obtain these results using a spatial model with a commuter railway. Next, by simulation, we demonstrate that the book-valuation effect of book-value-based ROR regulation causes Japanese urban railways to underinvest in railroad right of way, which results in extreme congestion during rush hours.

A general-equilibrium analysis of airport pricing, capacity, and regulation

Using a general-equilibrium model that includes consumers, airlines, and an airport with both aeronautical services and non-aeronautical services, this study investigates the airports decisions on its aeronautical charge and capacity, as well as the size of its non-aeronautical services. In contrast to the existing literature, we formally model an airports non-aeronautical services by taking into account the endogenous determination of the size of the airports non-aeronautical services. First, we characterize the results for welfare maximization, and find that the self-financing property does not hold. Apart from carriers’ market power as a source of the failure for the self-financing property, we identify the presence of non-aeronautical services as a new source. Further, we show that the common practice of cross-subsidizing from the non-aeronautical to aeronautical services is incompatible with welfare maximization because welfare maximization requires exact self-financing within the non-aeronautical sector. Second, we derive the results for profit maximization by a monopolistic airport, and demonstrate that the imposition of two taxes, one on the airports aeronautical services and the other on its capacity investment, can recover the welfare-maximization results. Third, we analyze the two types of regulation, single till and dual till, which are often used in practice, and show that dual-till regulation yields higher welfare than single-till regulation, as long as the profit from non-aeronautical services is positive. This result is in contrast to the prevailing wisdom in the literature, which in general favors single-till regulation.

A model of Internet access when Internet connection speed is upgradable

Using a model in which the speed of Internet connection is upgradable by service provider’s investment, we compare the results in the first-best, the second-best, and monopoly profit-maximizing situations. In the second-best, where a monopoly’s profit must be non-negative, the number of Internet users is smaller and the speed of Internet connections is slower compared with the first-best, if a marginal Internet user increases information variety and thus gives positive externalities to all Internet users. In the case where a monopoly maximizes its profit, these distortions are further magnified. We then consider possible remedies to attain the first-best.