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Strategic Choice of the Price Structure and Entry Deterrence Under Price Cap Regulation

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  • Alberto Iozzi
  • Marco Fioramanti

Abstract

This paper shows that a price‐capped firm under the threat of entry in some of the markets it serves can strategically manipulate its price structure to deter entry. In doing so, the regulated firm uses the price cap constraint as a commitment device to an aggressive pricing behaviour in case of entry. A (dynamic) price cap generally entails that the prices allowed today are a function of the previous‐period prices and that the tighter is the constraint on each price, the larger is the quantity sold of this good in the previous period. Hence, the regulated firm may strategically choose its price structure before entry to place a tighter regulatory control on the prices set in the (potentially) competitive markets and to make it optimal to charge in these markets – in case of entry – prices so low that entry is unprofitable.

Suggested Citation

  • Alberto Iozzi & Marco Fioramanti, 2004. "Strategic Choice of the Price Structure and Entry Deterrence Under Price Cap Regulation," Bulletin of Economic Research, Wiley Blackwell, vol. 56(4), pages 333-352, October.
    • Handle: RePEc:bla:buecrs:v:56:y:2004:i:4:p:333-352
    DOI: 10.1111/j.1467-8586.2004.00208.x
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    5. Guthrie, Graeme, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Working Paper Series 18946, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.

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