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Price cap regulation with limited commitment

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  • Bouvard, Matthieu
  • Jullien, Bruno

Abstract

We consider the price-cap regulation of a monopolistic network operator when the regulator has limited commitment. Operating the network requires xed investments and the regulator has the opportunity to unilaterally revise the price cap at random times. When the regulator maximizes consumer surplus, he has an incentive to lower the price cap once the operator's xed investments are sunk. This hold-up problem gives rise to two types of ineciencies. In one type of equilibrium, the operator breaks even but strategically under-invests to induce the regulator to maintain the price cap. In another type of equilibrium the operator makes strictly positive prots and periods of high investment and high prices are followed by periods of low prices and capacity decline. Overall, the model suggests that the regulator's lack of commitment limits the deployment of network infrastructures.

Suggested Citation

  • Bouvard, Matthieu & Jullien, Bruno, 2025. "Price cap regulation with limited commitment," TSE Working Papers 25-1659, Toulouse School of Economics (TSE).
    • Handle: RePEc:tse:wpaper:130871
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    References listed on IDEAS

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    1. repec:vuw:vuwscr:18977 is not listed on IDEAS
    2. Evans, Lewis T. & Guthrie, Graeme A., 2005. "Risk, price regulation, and irreversible investment," International Journal of Industrial Organization, Elsevier, vol. 23(1-2), pages 109-128, February.
    3. Evans, Lewis & Guthrie, Graeme, 2005. "Risk, Price Regulation, and Irreversible Investment," Working Paper Series 18977, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    4. Evans, Lewis T. & Guthrie, Graeme A., 2005. "Risk, price regulation, and irreversible investment," International Journal of Industrial Organization, Elsevier, vol. 23(1-2), pages 109-128, February.
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