Optimal price regulation in a growth model with monopolistic suppliers of intermediate goods

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Optimal price regulation in a growth model with monopolistic suppliers of intermediate goods

Author Info

Lewis Evans
Neil Quigley
Jie Zhang

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Abstract

In this paper we investigate the trade-off faced by regulators who must set a price for an intermediate good somewhere between the marginal cost and the monopoly price. We utilize a growth model with monopolistic suppliers of intermediate goods. Investment in innovation is required to produce a new intermediate good. Marginal cost pricing deters innovation, while monopoly pricing maximizes innovation and economic growth at the cost of some static inefficiency. We demonstrate the existence of a second-best price above the marginal cost but below the monopoly price, which maximizes consumer welfare. Simulation results suggest that substantial reductions in consumption, production, growth, and welfare occur where regulators focus on static efficiency issues by setting prices at or near marginal cost.

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Publisher Info
Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 36 (2003)
Issue (Month): 2 (May)
Pages: 463-474
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Handle: RePEc:cje:issued:v:36:y:2003:i:2:p:463-474

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Related research
Keywords:

Find related papers by JEL classification:
D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing
O38 - Economic Development, Technological Change, and Growth - - Technological Change - - - Government Policy

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Lewis Evans and Patrick Hughes, 2003. "Competition Policy in Small Distant Open Economies: Some Lessons from the Economics Literature," Treasury Working Paper Series 03/31, New Zealand Treasury. [Downloadable!]

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This page was last updated on 2009-12-21.

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