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* Luis Correia da Silva, Leonardo Mautino, Paul Dudley and Elizabeth Payling 1. INTRODUCTION In recent years service quality has taken on prominence in regulated industries where regulatory authorities have been concerned with avoiding quality degradation, and with creating the right incentives for regulated companies to deliver optimal levels of quality. In principle, the optimal level of quality of service is set when the incremental cost of providing that quality of service is equal to the incremental willingness to pay and therefore the incremental charge for that service. At levels of service below this, the incremental willingness to pay may exceed the incremental cost; the converse may be the case above this equilibrium. This approach can then be used to determine the appropriate level of investment for quality of service (Reay, 1993). In a free market the quality of service can act as a product characteristic, in addition to price, with which to compare the offerings of alternative providers, provided that the measures of quality of service are themselves comparable. Customers have the option of alternative providers and thereby can choose their preferred offering of price and service.1 The provider may be expected to benefit in terms of sales from improvements in service quality and, conversely, lose out in terms of sales from deterioration in service quality. In these circumstances, the market creates the incentive to compete on price and service. In the presence of market imperfections or insufficient competition, there is a role for regulation to...