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Pricing Discretion and Price Regulation in Competitive Industries

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  • 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

Suggested Citation

  • Alberto Iozzi & Roberta Sestini & Edilio Valentini, 2006. "Pricing Discretion and Price Regulation in Competitive Industries," Journal of Regulatory Economics, Springer, vol. 29(2), pages 151-165, March.
    • Handle: RePEc:kap:regeco:v:29:y:2006:i:2:p:151-165
    DOI: 10.1007/s11149-006-6033-4
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    References listed on IDEAS

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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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    More about this item

    Keywords

    Price regulation; Pricing discretion; Competition; L13; L50;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General

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