The effect of future price expectations on customers' willingness to make sunk investments in reliance on a monopoly service

Regulatory agencies routinely seek to promote price stability. Such practices have no clear rationale under the neoclassical approach to public utility regulation. An alternative view, which can justify price stability, is that public utility regulation exists to protect customers’ relationship-specific sunk investments. Using data from the Swedish district heating sector during the 1998-2007 period, we find evidence that customers make predictions about future prices and that they are more reluctant to take up the monopoly service when the probability for future price increases and price variability go up. These results suggest that a primary benefit of public utility regulation is the assurance of stability in future prices.