IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Price caps regulation with capacity precommitment

  • Moreno, Diego
  • Lemus, A.
Registered author(s):

    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.

    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: no

    Paper provided by Universidad Carlos III de Madrid. Departamento de Economía in its series UC3M Working papers. Economics with number we1309.

    in new window

    Date of creation: 01 Aug 2014
    Date of revision:
    Handle: RePEc:cte:werepe:we1309
    Contact details of provider: Web page:

    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. 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.
    2. Jean J. Gabszewicz & Sougata Poddar, 1997. "Demand fluctuations and capacity utilization under duopoly," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 10(1), pages 131-146.
    3. Stanley Reynolds & David Rietzke, 2015. "Price caps, oligopoly, and entry," Working Papers 80998880, Lancaster University Management School, Economics Department.
    4. Dixit, Avinash, 1991. "Irreversible Investment with Price Ceilings," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 541-57, June.
    5. Ian M. Dobbs, 2004. "Intertemporal price cap regulation under uncertainty," Economic Journal, Royal Economic Society, vol. 114(495), pages 421-440, 04.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    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: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 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.