Rate of Return Regulation and Product Variety

This paper examines the effect of rate of regulation on a monopolist that faces a market of observationally identical but heterogeneous consumers. Under plausible technological conditions, rate of return regulation increases the quality offered to any consumer and expands the variety of products it offers. Some consumers receive a quality that is greater than the socially optimal quality. Rate of return regulation unambiguously increases consumers' surplus. If the allowed rate of return is close to the monopoly rate of return, social welfare increases as well.