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Pro-Consumer Price Ceilings under Regulatory Uncertainty

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  • Bennett, John
  • Chioveanu, Ioana

Abstract

We examine optimal price ceilings when the regulator is uncertain about demand and supply conditions and maximizes expected consumer surplus. We consider both a perfectly competitive benchmark and imperfectly competitive settings where symmetric firms compete in supply functions. Our analysis indicates that regulatory uncertainty does not eliminate the scope for intervention with a price ceiling. Instead, sufficient uncertainty calls for softer intervention, with the price ceiling set at a relatively high level. We formalize the relationship between competitive pressure and the optimal price ceiling and show that, if uncertainty is great enough, the optimal price ceiling is increasing in the degree of competition, so that greater competitive pressure justifies less restrictive regulatory intervention. For the perfectly competitive case, we also explore how the optimal price ceiling is related to the level of rationing efficiency, pinning down a cut-off level of efficiency below which a price ceiling should not be used.

Suggested Citation

  • Bennett, John & Chioveanu, Ioana, 2016. "Pro-Consumer Price Ceilings under Regulatory Uncertainty," MPRA Paper 72161, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:72161
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    References listed on IDEAS

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    More about this item

    Keywords

    price regulation; consumer surplus; uncertainty;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L5 - Industrial Organization - - Regulation and Industrial Policy

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