Abstract
The present paper analyzes performance of a variant of rate-of-return regulation called the ex-post adjustment regulation put in effect in the Korean petroleum refinery sector. Unlike the traditional rate-of-return regulation on a monopoly, the regulation is first for the oligopolistic industry as a whole and second of the ex post nature. Under the regulation, at the end of each year, each firm is responsible to pay a certain portion of the excess of the total realized profits in the industry over the allowed profits. It is shown that if the excess profits are completely collected(including the interests), the social optimum can be realized. When only a portion of the excess profits can be collected, the regulation generally increases consumer surplus by making the firms more competitive. Each individual firm's production under the regulation depends on whether the firm's output is regarded as a strategic substitute or complement of other firms'output.
