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On the design of price caps as sanctions

Author

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  • Turner, Douglas C.
  • Sappington, David E.M.

Abstract

A ceiling has been imposed on the price at which Russian producers can sell oil. The price cap is intended to reduce Russian government tax revenue without increasing the world price of oil excessively. We show that such price caps can have counterintuitive effects. A price cap can induce sanctioned producers to increase their output, thereby increasing their revenue. This increased output can also reduce the world price of the homogeneous product supplied by sanctioned and non-sanctioned producers. The welfare-maximizing price cap, which is often well below the unrestricted world price, can increase welfare substantially.

Suggested Citation

  • Turner, Douglas C. & Sappington, David E.M., 2024. "On the design of price caps as sanctions," International Journal of Industrial Organization, Elsevier, vol. 97(C).
    • Handle: RePEc:eee:indorg:v:97:y:2024:i:c:s0167718724000547
    DOI: 10.1016/j.ijindorg.2024.103099
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    References listed on IDEAS

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    1. Johnson, Simon & Rachel, Lukasz & Wolfram, Catherine, 2023. "Design and implementation of the price cap on Russian oil exports," Journal of Comparative Economics, Elsevier, vol. 51(4), pages 1244-1252.
    2. Becko, John Sturm, 2024. "A theory of economic sanctions as terms-of-trade manipulation," Journal of International Economics, Elsevier, vol. 150(C).
    3. Blaise Allaz & Jean-Luc Vila, 1993. "Cournot Competition, Forward Markets and Efficiency," Post-Print hal-00511806, HAL.
    4. John Sturm, 2023. "How Should Sanctions Account for Bystander Countries?," AEA Papers and Proceedings, American Economic Association, vol. 113, pages 39-42, May.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D60 - Microeconomics - - Welfare Economics - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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