Pricing Discretion and Price Regulation in Competitive Industries
Price capped firms enjoy a large degree of pricing discretion, which may damage captive customers and have adverse effects on the development of competition when regulated firms also operate in competitive industries. We study two alternative regulatory approaches to limit such a discretion. The first one places a fixed upper limit to the prices charged in captive markets; the other constrains the captive prices relatively to the price asset in the more competitive markets. We refer to the former approach as the Absolute regime, and to the latter as the Relative regime. We analyse the effects on prices, competition, and welfare stemming from the two regimes in a simple model where the regulated firm faces competition by a competitive fringe in some of the markets it serves. We find that the Relative regime is not much more effective in protecting captive customers since captive prices may be identical under both regimes. Moreover, since it makes more costly to the incumbent regulated firm to reduce its competitive price, this is weakly higher than under the Absolute regime. However, this is also the reason why the Relative regime turns out to be more pro-competitive: the total output supplied by competitors and/or the number of firms entering the potentially competitive market might be enhanced under this rule. The effects on aggregate welfare are ambiguous. We provide some evidence that the Relative regime is more likely to positively affect consumers' surplus and social welfare the more efficient is the competitive fringe.
|Date of creation:||04 Apr 2005|
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- Armstrong, Mark & Vickers, John, 1993.
"Price Discrimination, Competition and Regulation,"
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- Otero, Jesus & Waddams Price, Catherine, 2001. "Price Discrimination, Regulation and Entry in the UK Residential Electricity Market," Bulletin of Economic Research, Wiley Blackwell, vol. 53(3), pages 161-175, July.
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- repec:ccp:journl:v:53:y:2000:i:3:p:161-175 is not listed on IDEAS
- Alberto Iozzi & Marco Fioramanti, 2004. "Strategic Choice of the Price Structure and Entry Deterrence Under Price Cap Regulation," Bulletin of Economic Research, Wiley Blackwell, vol. 56(4), pages 333-352, October.
- Armstrong, Mark & Vickers, John, 2000. "Multiproduct Price Regulation under Asymmetric Information," Journal of Industrial Economics, Wiley Blackwell, vol. 48(2), pages 137-160, June.
- John Vickers, 2005. "Abuse of Market Power," Economic Journal, Royal Economic Society, vol. 115(504), pages 244-261, 06.
- Anton, James J. & Vander Weide, James H. & Vettas, Nikolaos, 2002. "Entry auctions and strategic behavior under cross-market price constraints," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 611-629, May.
- Mark Armstrong & John Vickers, 1991. "Welfare Effects of Price Discrimination by a Regulated Monopolist," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 571-581, Winter. Full references (including those not matched with items on IDEAS)
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