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Price Caps as Welfare-Enhancing Coopetition

Author

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  • Patrick Rey
  • Jean Tirole

Abstract

The paper analyzes the impact of price caps agreed upon by industry participants. Price caps, like mergers, allow firms to solve Cournot’s multiple-marginalization problem, but unlike mergers, they do not stifle price competition in case of substitutes or facilitate foreclosure in case of complements. The paper first demonstrates this for nonrepeated interaction and general demand and cost functions. It then shows that allowing price caps has no impact on investment and entry in case of substitutes. Under more restrictive assumptions, the paper finally generalizes the insights to repeated price interaction, analyzing coordinated effects when goods are not necessarily substitutes.

Suggested Citation

  • Patrick Rey & Jean Tirole, 2019. "Price Caps as Welfare-Enhancing Coopetition," Journal of Political Economy, University of Chicago Press, vol. 127(6), pages 3018-3069.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/702014
    DOI: 10.1086/702014
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    11. Thomas D. Jeitschko & Yeonjei Jung & Jaesoo Kim, 2017. "Bundling and joint marketing by rival firms," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(3), pages 571-589, September.
    12. Lana Friesen & Lata Gangadharan & Peyman Khezr & Ian A. MacKenzie, 2020. "Mind your Ps and Qs! An Experiment on Variable Allowance Supply in the US Regional Greenhouse Gas Initiative," Discussion Papers Series 618, School of Economics, University of Queensland, Australia.
    13. Pagnozzi, Marco & Piccolo, Salvatore & Reisinger, Markus, 2021. "Vertical contracting with endogenous market structure," Journal of Economic Theory, Elsevier, vol. 196(C).
    14. David Bounies & Antoine Dubus & Patrick Waelbroeck, 2020. "Market for Information and Selling Mechanisms," Working Papers ECARES 2020-07, ULB -- Universite Libre de Bruxelles.
    15. Emanuele Bacchiega & Elias Carroni & Alessandro Fedele, 2023. "Monopolistic Duopoly," BEMPS - Bozen Economics & Management Paper Series BEMPS101, Faculty of Economics and Management at the Free University of Bozen.
    16. Pu‐yan Nie & Hong‐xing Wen & Chan Wang, 2023. "Price cap regulation under duopoly," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(3), pages 1376-1382, April.
    17. Wang, Lucy Xiaolu, 2022. "Global drug diffusion and innovation with the medicines patent pool," Journal of Health Economics, Elsevier, vol. 85(C).
    18. Zhijun Chen & Patrick Rey, 2019. "Competitive cross‐subsidization," RAND Journal of Economics, RAND Corporation, vol. 50(3), pages 645-665, September.
    19. Etro, Federico, 2023. "Platform competition with free entry of sellers," International Journal of Industrial Organization, Elsevier, vol. 89(C).
    20. Neven, Damien & Piccolo, Salvatore & Andreu, Enrique, 2021. "Price Authority and Information Sharing with Competing Principals," CEPR Discussion Papers 16753, C.E.P.R. Discussion Papers.
    21. David Bounie & Antoine Dubus & Patrick Waelbroeck, 2022. "Market for Information and Selling Mechanisms," CER-ETH Economics working paper series 22/367, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    22. Spielmann, Nathalie & Williams, Christopher, 2016. "It goes with the territory: Communal leverage as a marketing resource," Journal of Business Research, Elsevier, vol. 69(12), pages 5636-5643.
    23. Carmen D à lvarez-Albelo & José A Martínez-González, 2024. "Should antitrust regulators be wary of inter-firm coordination agreements through a tourism destination card?," Tourism Economics, , vol. 30(2), pages 324-344, March.
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    25. Griem Fabian, 2020. "Payment System Self-Regulation through Fee Caps," Review of Network Economics, De Gruyter, vol. 18(3), pages 141-167, September.

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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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