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Short Term and Long Term Effects of Price Cap Regulation

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  • Gianni De Fraja
  • Alberto Iozzi

Abstract

This paper uses a very simple example (two goods, linear symmetric demand and cost) to study the effects of the price cap regulatory mechanism. We show that if a given price vector is preferred (using current welfare as the criterion) to another, then it is not necessarily the case that it is also preferred in the long run (using the presented discounted value of welfare as the criterion). The relationship between current welfare and profit and therefore the firm's incentive to bargain for a given price vector depend on the specific details of the mechanism considered.

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File URL: http://www.york.ac.uk/media/economics/documents/discussionpapers/2000/0061.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of York in its series Discussion Papers with number 00/61.

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Handle: RePEc:yor:yorken:00/61

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Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
Phone: (0)1904 323776
Fax: (0)1904 323759
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Web page: http://www.york.ac.uk/economics/
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Related research

Keywords: Ramsey prices; Price cap regulation.;

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References

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  1. Baumol, William J & Bradford, David F, 1970. "Optimal Departures from Marginal Cost Pricing," American Economic Review, American Economic Association, vol. 60(3), pages 265-83, June.
  2. Jeffrey I. Bernstein & David E. M. Sappington, 1998. "Setting the X Factor in Price Cap Regulation Plans," NBER Working Papers 6622, National Bureau of Economic Research, Inc.
  3. Vickers, John, 1997. "Regulation, Competition, and the Structure of Prices," Oxford Review of Economic Policy, Oxford University Press, vol. 13(1), pages 15-26, Spring.
  4. Brennan, Timothy J, 1989. "Regulating by Capping Prices," Journal of Regulatory Economics, Springer, vol. 1(2), pages 133-47, June.
  5. Cowan, Simon G B, 1997. "Tight Average Revenue Regulation Can Be Worse Than No Regulation," Journal of Industrial Economics, Wiley Blackwell, vol. 45(1), pages 75-88, March.
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Cited by:
  1. Carlos F. Alves & Cristina Barbot, 2010. "Does market concentration of downstream buyers squeeze upstream suppliers’ market power?," FEP Working Papers 387, Universidade do Porto, Faculdade de Economia do Porto.
  2. Cristina Barbot, 2002. "Does Airport Regulation Benefit Consumers?," FEP Working Papers 119, Universidade do Porto, Faculdade de Economia do Porto.
  3. 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.

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