Price caps regulation with capacity precommitment
In order to examine the effectiveness of price caps to regulate imperfectly competitive markets in which the demand is uncertain, we study a monopoly that makes irreversible capacity investments ex-ante, and then chooses its output upon observing the realization of demand. When capacity decisions have no precommitment value, price cap regulation remains fully effective. With capacity precommitment, however, the optimal price cap must trade off the incentives for capacity investment and capacity withholding, and is above the unit cost of capacity. While a price cap mitigates market power, it cannot eliminate inefficiencies. Capacity payments provide a useful complementary instrument.
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.:
- Dixit, Avinash, 1991. "Irreversible Investment with Price Ceilings," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 541-557, June.
- Stanley Reynolds & David Rietzke, 2015. "Price caps, oligopoly, and entry," Working Papers 80998880, Lancaster University Management School, Economics Department.
- Reynolds, Stanley S. & Wilson, Bart J., 2000. "Bertrand-Edgeworth Competition, Demand Uncertainty, and Asymmetric Outcomes," Journal of Economic Theory, Elsevier, vol. 92(1), pages 122-141, May.
- Ian M. Dobbs, 2004. "Intertemporal price cap regulation under uncertainty," Economic Journal, Royal Economic Society, vol. 114(495), pages 421-440, 04.
- Robert L. Earle & Karl Schmedders & Tymon Tatur, 2002. "Price Caps and Uncertain Demands," Discussion Papers 1340, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Jean J. Gabszewicz & Sougata Poddar, 1997.
"Demand fluctuations and capacity utilization under duopoly,"
Springer;Society for the Advancement of Economic Theory (SAET), vol. 10(1), pages 131-146.
- Gabszewicz, J.J. & Poddar, S., "undated". "Demand fluctuations and capacity utilization under duopoly," CORE Discussion Papers RP 1269, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- GABSZEWICZ, Jean J. & PODDAR , Sougata, 1995. "Demand Fluctuations and Capacity Utilization under Duopoly," CORE Discussion Papers 1995051, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Grimm Veronika & Zöttl Gregor, 2010. "Price Regulation under Demand Uncertainty," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-34, June.
- Cabral, Luis M B & Riordan, Michael H, 1989. "Incentives for Cost Reduction under Price Cap Regulation," Journal of Regulatory Economics, Springer, vol. 1(2), pages 93-102, June.
- Roques, Fabien A. & Savva, Nicos, 2009. "Investment under uncertainty with price ceilings in oligopolies," Journal of Economic Dynamics and Control, Elsevier, vol. 33(2), pages 507-524, February. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:cte:werepe:we1309. 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: (Ana Poveda)
If references are entirely missing, you can add them using this form.