IDEAS home Printed from
MyIDEAS: Login to save this article or follow this journal

Modeling investment behavior under price cap regulation

  • Thomas Nagel


  • Margarethe Rammerstorfer


Registered author(s):

    Motivated by the frequently observed criticism of the regulatory practice arising from companies in the industries concerned, we investigate the impact of regulation on investment behavior. Therefore, we model the investment timing and volume of a firm acting in a regulated market. When capping prices, the regulatory authority imposes a price ceiling on market prices. Accordingly, we use a real option approach where the price cap that limits possible future firm values enters the firm’s portfolio in form of a short call option position. By comparing this framework to a competitive benchmark model, we derive an optimal price setting rule for regulators. Moreover, it can be shown how deviations from this optimum affect the investment behavior of firms. Copyright Springer-Verlag 2009

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Springer in its journal Central European Journal of Operations Research.

    Volume (Year): 17 (2009)
    Issue (Month): 2 (June)
    Pages: 111-129

    in new window

    Handle: RePEc:spr:cejnor:v:17:y:2009:i:2:p:111-129
    Contact details of provider: Web page:

    Order Information: Web:

    References listed on IDEAS
    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.:

    as in new window
    1. Dixit, Avinash, 1991. "Irreversible Investment with Price Ceilings," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 541-57, June.
    2. Arthur Havenner & Thomas Hazlett & Zhiqiang Leng, 2001. "The Effects of Rate Regulation on Mean Returns and Non-Diversifiable Risk: The Case of Cable Television," Review of Industrial Organization, Springer, vol. 19(2), pages 149-164, September.
    3. Ian M. Dobbs, 2004. "Intertemporal price cap regulation under uncertainty," Economic Journal, Royal Economic Society, vol. 114(495), pages 421-440, 04.
    4. McDonald, Robert L & Siegel, Daniel R, 1985. "Investment and the Valuation of Firms When There Is an Option to Shut Down," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 331-49, June.
    5. M.E. Beesley & S.C. Littlechild, 1989. "The Regulation of Privatized Monopolies in the United Kingdom," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 454-472, Autumn.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:spr:cejnor:v:17:y:2009:i:2:p:111-129. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)

    or (Christopher F Baum)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.