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Optimal price regulation in a growth model with monopolistic suppliers of intermediate goods

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  • Lewis Evans
  • Neil Quigley
  • Jie Zhang

Abstract

In this paper we investigate the trade-off faced by regulators who must set a price for an intermediate good somewhere between the marginal cost and the monopoly price. We utilize a growth model with monopolistic suppliers of intermediate goods. Investment in innovation is required to produce a new intermediate good. Marginal cost pricing deters innovation, while monopoly pricing maximizes innovation and economic growth at the cost of some static inefficiency. We demonstrate the existence of a second-best price above the marginal cost but below the monopoly price, which maximizes consumer welfare. Simulation results suggest that substantial reductions in consumption, production, growth, and welfare occur where regulators focus on static efficiency issues by setting prices at or near marginal cost.

Suggested Citation

  • Lewis Evans & Neil Quigley & Jie Zhang, 2003. "Optimal price regulation in a growth model with monopolistic suppliers of intermediate goods," Canadian Journal of Economics, Canadian Economics Association, vol. 36(2), pages 463-474, May.
  • Handle: RePEc:cje:issued:v:36:y:2003:i:2:p:463-474
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Angus C. Chu & Ching-Chong Lai & Chih-Hsing Liao, 2010. "A Tale of Two Growth Engines: The Interactive Effects of Monetary Policy and Intellectual Property Rights," IEAS Working Paper : academic research 10-A006, Institute of Economics, Academia Sinica, Taipei, Taiwan.
    2. Lewis Evans and Patrick Hughes, 2003. "Competition Policy in Small Distant Open Economies: Some Lessons from the Economics Literature," Treasury Working Paper Series 03/31, New Zealand Treasury.
    3. Gilad Sorek, 2017. "Market Power and Growth through Vertical and Horizontal Competition," Auburn Economics Working Paper Series auwp2017-01, Department of Economics, Auburn University.
    4. repec:eee:eecrev:v:98:y:2017:i:c:p:392-409 is not listed on IDEAS
    5. Chu, Angus C., 2015. "From Solow to Romer: Teaching Endogenous Technological Change in Undergraduate Economics," MPRA Paper 81972, University Library of Munich, Germany, revised Oct 2017.
    6. Chu, Angus C. & Cozzi, Guido & Furukawa, Yuichi, 2013. "Inflation, Unemployment and Economic Growth in a Schumpeterian Economy," MPRA Paper 50510, University Library of Munich, Germany.
    7. Chu, Angus C. & Cozzi, Guido & Furukawa, Yuichi & Liao, Chih-Hsing, 2017. "Inflation and economic growth in a Schumpeterian model with endogenous entry of heterogeneous firms," European Economic Review, Elsevier, vol. 98(C), pages 392-409.
    8. Furukawa, Yuichi & Lai, Tat-kei & Sato, Kenji, 2017. "Receptivity and Innovation," MPRA Paper 81536, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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