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On Price Caps Under Uncertainty

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  • Robert Earle
  • Karl Schmedders
  • Tymon Tatur

Abstract

This paper shows how standard arguments supporting the imposition of price caps break down in the presence of demand uncertainty. In particular, though in the deterministic case the introduction or lowering of a price cap (above marginal cost) results in increased production, increased total welfare, decreased prices, and increased consumer welfare, we show that all of the above comparative statics predictions fail for generic uncertain demand functions. For example, for price caps sufficiently close to marginal cost, a decrease in the price cap always leads to a decrease in production and total welfare under certain mild conditions. Under stronger regularity assumptions, all of the monotone comparative statics predictions from the deterministic case also do not hold for a generic uncertain demand if we restrict attention to price caps in an arbitrary fixed interval (as long as the price caps are binding for some values in that interval). Copyright 2007, Wiley-Blackwell.

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File URL: http://hdl.handle.net/10.1111/j.1467-937X.2007.00415.x
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Bibliographic Info

Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 74 (2007)
Issue (Month): 1 ()
Pages: 93-111

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Handle: RePEc:oup:restud:v:74:y:2007:i:1:p:93-111

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Cited by:
  1. Laszlo Goerke & Frederik Herzberg & Thorsten Upmann, 2012. "Failure of Ad Valorem and Specific Tax Equivalence under Uncertainty," IAAEU Discussion Papers 201205, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).
  2. Angela S. Bergantino & Etienne Billette De Villemeur & Annalisa Vinella, 2011. "Partial Regulation in Vertically Differentiated Industries," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 13(2), pages 255-287, 04.
  3. Alfredo Garcia & Ennio Stacchetti, 2011. "Investment dynamics in electricity markets," Economic Theory, Springer, vol. 46(2), pages 149-187, February.
  4. Luis Corchón & Félix Marcos, 2010. "Price regulation in oligopoly," Economics Working Papers we100101, Universidad Carlos III, Departamento de Economía.
  5. Roques, Fabien A. & Savva, Nicos, 2009. "Investment under uncertainty with price ceilings in oligopolies," Journal of Economic Dynamics and Control, Elsevier, vol. 33(2), pages 507-524, February.
  6. Roques, F.A. & Savva , N.S., 2006. "Price Cap Regulation and Investment Incentives under Demand Uncertainty," Cambridge Working Papers in Economics 0636, Faculty of Economics, University of Cambridge.
  7. de Frutos, Maria-Angeles & Fabra, Natalia & Von der Fehr, Nils-Henrik M, 2008. "Investment Incentives and Auction Design in Electricity Markets," CEPR Discussion Papers 6626, C.E.P.R. Discussion Papers.
  8. Antonio Estache & L. Wren-Lewis, 2008. "Towards a Theory of Regulation for Developing Countries: Following Laffont's Lead," Working Papers ECARES 2008_018, ULB -- Universite Libre de Bruxelles.
  9. Zöttl, Gregor, 2011. "On optimal scarcity prices," International Journal of Industrial Organization, Elsevier, vol. 29(5), pages 589-605, September.

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