10 - Regulating Quality

Summary

Because quality is multidimensional with costs sometimes hard to measure and because many attributes can be quite difficult to verify, both ex ante and ex post, there is a role for a specific intervention on quality of service in regulated industries. The main role of regulation is to minimize the risks of unreliability of services and overinvestment in marketing, and to ensure that pricing is efficient, fair and financially sustainable. These risks are influenced by the specific choice of price regulation. High-powered regimes such as price caps are likely to lead to underinvestment while low-powered regimes such as cost-plus or rate-of-return regulation are likely to lead to overinvestment in quality. To minimize the risks of mistargeting intervention, budgets allocated to quality control and audits have to match the monitoring and enforcement requirements. To reduce information asymmetries, benchmarking, certifications and quality assessments produced from user surveys offer solutions. Fines and penalties to reduce the incentives to cheat must be set to ensure that cost savings linked to non-compliance with quality obligations are at least wiped out.