PaperA uniform profit margin policy and its effects on mineral producing firms The case of the oil industry
Review articleOpen access
Abstract:

AbstractThe current paper highlights the lack of any framework for the analysis of the effects of current methods of rate of return regulation on the target firms and proposes an alternative method based on the market cost of the capital invested in a regulated firm. Using a framework developed from an earlier model, the effects of a uniform profit margin (UPM) on the efficiencies of oil firms are examined. The results show that the effects depend on the type of firm and on whether the UPM is below or above the firm's capital expansion rate (CER). Essentially, UPM will make the most efficient firms (MEFs) operate at a lower or higher efficiency level depending on whether they are below or above their CER; make accelerated cost firms (ACFs) more inefficient in terms of higher supernormal profits at the expense of society; and make accelerated production firms (APFs) more efficient, provided there are no restrictions on the firms' choice of method of adjusting production rates. In general, the approach encourages firms that have less than desirable investment levels to raise the level, and discourages excessive investment for the sole aim of reaping higher profits.

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