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Pricing Discretion and Price Regulation in Competitive Industries

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Author Info

  • Alberto Iozzi

    ()

  • Roberta Sestini

    ()

  • Edilio Valentini

    ()

Abstract

Price capped firms enjoy a large degree of pricing discretion, which may harm customers and competition. We study two alternative regulatory regimes to limit it: the first regime (Absolute) places a fixed upper limit to the prices charged in captive markets, while the other regime (Relative) constrains the captive prices relatively to the competitive ones. Under the Relative regime, captive prices are only weakly lower and competitive prices are always higher than under the Absolute regime. However, the number of competitors and/or their output may be higher under the Relative regime. While the effects on aggregate welfare are ambiguous, there is some evidence that the Relative regime is more likely to increase consumers’ surplus and social welfare the more efficient are the competitors. Copyright Springer Science+Business Media, Inc. 2006

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File URL: http://hdl.handle.net/10.1007/s11149-006-6033-4
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Bibliographic Info

Article provided by Springer in its journal Journal of Regulatory Economics.

Volume (Year): 29 (2006)
Issue (Month): 2 (03)
Pages: 151-165

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Handle: RePEc:kap:regeco:v:29:y:2006:i:2:p:151-165

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Web page: http://www.springerlink.com/link.asp?id=100298

Related research

Keywords: Price regulation; Pricing discretion; Competition; L13; L50;

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References

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  1. Armstrong, M. & Doyle, C. & Vickers, J., 1995. "The access pricing problem: a synthesis," Discussion Paper Series In Economics And Econometrics 9532, Economics Division, School of Social Sciences, University of Southampton.
  2. 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.
  3. Otero, Jesus & Waddams Price, Catherine, 2001. "Price Discrimination, Regulation and Entry in the UK Residential Electricity Market," Bulletin of Economic Research, Wiley Blackwell, vol. 53(3), pages 161-75, July.
  4. Armstrong, Mark & Vickers, John, 1993. "Price Discrimination, Competition and Regulation," Journal of Industrial Economics, Wiley Blackwell, vol. 41(4), pages 335-59, December.
  5. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
  6. Alberto Iozzi, 2001. "Strategic pricing and entry deterrence under price-cap regulation," Journal of Economics, Springer, vol. 74(3), pages 283-300, October.
  7. repec:ccp:journl:v:53:y:2000:i:3:p:161-175 is not listed on IDEAS
  8. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, January.
  9. Varian, Hal R., 1989. "Price discrimination," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 10, pages 597-654 Elsevier.
  10. Anton, James J. & Vander Weide, James H. & Vettas, Nikolaos, 2002. "Entry auctions and strategic behavior under cross-market price constraints," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 611-629, May.
  11. Dieter Bös & Lorenz Nett, 1990. "Privatization, price regulation, and market entry an asymmetric multistage Duopoly model," Journal of Economics, Springer, vol. 51(3), pages 221-257, October.
  12. Ireland, Norman J, 1992. "On the Welfare Effects of Regulating Price Discrimination," Journal of Industrial Economics, Wiley Blackwell, vol. 40(3), pages 237-48, September.
  13. John Vickers, 2005. "Abuse of Market Power," Economic Journal, Royal Economic Society, vol. 115(504), pages F244-F261, 06.
  14. Armstrong, Mark & Vickers, John, 2000. "Multiproduct Price Regulation under Asymmetric Information," Journal of Industrial Economics, Wiley Blackwell, vol. 48(2), pages 137-60, June.
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Cited by:
  1. Kevin Currier, 2009. "Price cap regulation of a dominant firm facing competition," Journal of Economics, Springer, vol. 98(3), pages 221-233, December.

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