Short ContributionA non-Bayesian piecewise linear approximation adjustment process for incentive regulation

The chord-approximation adjustment process for incentive regulation of public utilities suggested by [Vogelsang, I., 1988. A Little Paradox in the Design of Regulatory Mechanisms, International Economic Review 29(3), 467-476.] induces the regulated firm to engage in strategic behaviour instead of converging to marginal cost pricing. In this paper, we show how a non-Bayesian piecewise linear approximation of demand can eliminate this problem.