Review of Industrial Organization 22: 179–182, 2003.
The Impact of Rate-of-Return Regulation on Technological Innovation,MarkW.
Frank, The Bruton Center for Development Studies. Burlington, VT: Ashgate
Publishing Company, 2001, ix + 135 pages, $69.95. ISBN 0-7546-1609-6.
The key premise of this book is that the effect of regulation on the performance of
ﬁrms with market power remains economically skeptical in terms of technological
advancement and economic progress. The approach focuses on the technological
change of monopolies subject to rate regulation. Speciﬁcally, regulation may cause
monopolistic ﬁrms to conduct technological advancement at less than the optimal
level as the costs of regulation outweigh the beneﬁts. Professor Frank identiﬁes
two research questions concerning the impact of government regulation on the
innovativeness of ﬁrms with market power. The ﬁrst is whether or not regulation
motivates monopolies to invest more in technological innovation than otherwise.
The second is whether or not social welfare advances more greatly with monopolies
inducing more incentive for research and development. The study is based on the
contributions of Schumpeter, mainly the idea that there is a positive relationship
between monopoly power and innovation and the possibility that regulation could
impact the innovation of monopolies.
The book consists of an introduction and six chapters. The introduction starts
out by noting that although the literature on rate-of-return regulation has long
ﬂourished, attempts to ﬁnd an impact of regulation on innovation have been few.
The introduction also provides a road map of the book and highlights the extent to
which government regulation is limited to rate-of-return regulation.
Chapter 1 presents an overview of the general development of rate-of-return
regulation and its impact on public utilities. Though historically regulation of
gas, telephone, and electric utilities revealed very similar patterns with initially a
stable regulatory environment, deregulation in each industry proceeded in disparate
ways. Whereas the gas and telephone industries have largely succeeded in their
liberations, the electricity industry is just beginning this process of removing rate-
of-return regulation. In addition to the delay of deregulation, the primary dispute in
electricity involves who should bear the burden of past investments that are unlikely
to be recovered with competitive pricing.
Chapter 2 revisits the theoretical model of regulation presented by Harvey
Averch and Leland Johnson. The analysis of the Averch–Johnson effect is based