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Short Term and Long Term Effects of Price Cap Regulation

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Author Info
Gianni De Fraja
Alberto Iozzi

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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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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
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Related research
Keywords: Ramsey prices; Price cap regulation.;

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Find related papers by JEL classification:
I28 - Health, Education, and Welfare - - Education - - - Government Policy
D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

References listed on IDEAS
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  1. Ingo Vogelsang & Jorg Finsinger, 1979. "A Regulatory Adjustment Process for Optimal Pricing by Multiproduct Monopoly Firms," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 157-171, Spring. [Downloadable!] (restricted)
  2. Brennan, Timothy J, 1989. "Regulating by Capping Prices," Journal of Regulatory Economics, Springer, vol. 1(2), pages 133-47, June.
  3. Cowan, Simon G B, 1997. "Tight Average Revenue Regulation Can Be Worse Than No Regulation," Journal of Industrial Economics, Blackwell Publishing, vol. 45(1), pages 75-88, March. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
  5. 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.
  6. Bernstein, Jeffrey I & Sappington, David E M, 1999. "Setting the X Factor in Price-Cap Regulation Plans," Journal of Regulatory Economics, Springer, vol. 16(1), pages 5-25, July. [Downloadable!] (restricted)
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  7. Mark Armstrong & John Vickers, 1991. "Welfare Effects of Price Discrimination by a Regulated Monopolist," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 571-581, Winter. [Downloadable!] (restricted)
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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.)

  1. Cristina Barbot, 2002. "Does Airport Regulation Benefit Consumers?," FEP Working Papers 119, Universidade do Porto, Faculdade de Economia do Porto. [Downloadable!]
  2. Bergantino, Angela Stefania & De Villemeur, Étienne & Vinella, Annalisa, 2007. "Partial Regulation in Vertically Differentiated Industries," IDEI Working Papers 502, Institut d'Économie Industrielle (IDEI), Toulouse, revised Jun 2009. [Downloadable!]
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This page was last updated on 2009-12-1.

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