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Short Term and Long Term Effects of Price Cap Regulation

Author

Listed:
  • Gianni De Fraja
  • Alberto Iozzi

Abstract

This paper uses a very simple example (two goods, linear symmetric demand and cost) to study the effects of the price cap regulatory mechanism. We show that if a given price vector is preferred (using current welfare as the criterion) to another, then it is not necessarily the case that it is also preferred in the long run (using the presented discounted value of welfare as the criterion). The relationship between current welfare and profit and therefore the firm's incentive to bargain for a given price vector depend on the specific details of the mechanism considered.

Suggested Citation

  • Gianni De Fraja & Alberto Iozzi, "undated". "Short Term and Long Term Effects of Price Cap Regulation," Discussion Papers 00/61, Department of Economics, University of York.
    • Handle: RePEc:yor:yorken:00/61
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    File URL: https://www.york.ac.uk/media/economics/documents/discussionpapers/2000/0061.pdf
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    References listed on IDEAS

    as
    1. Bernstein, Jeffrey I & Sappington, David E M, 1999. "Setting the X Factor in Price-Cap Regulation Plans," Journal of Regulatory Economics, Springer, vol. 16(1), pages 5-25, July.
    2. Baumol, William J & Bradford, David F, 1970. "Optimal Departures from Marginal Cost Pricing," American Economic Review, American Economic Association, vol. 60(3), pages 265-283, June.
    3. M.E. Beesley & S.C. Littlechild, 1989. "The Regulation of Privatized Monopolies in the United Kingdom," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 454-472, Autumn.
    4. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, April.
    5. Brennan, Timothy J, 1989. "Regulating by Capping Prices," Journal of Regulatory Economics, Springer, vol. 1(2), pages 133-147, June.
    6. Simon G. B. Cowan, 1997. "Tight Average Revenue Regulation Can Be Worse Than No Regulation," Journal of Industrial Economics, Wiley Blackwell, vol. 45(1), pages 75-88, March.
    7. Vickers, John, 1997. "Regulation, Competition, and the Structure of Prices," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 13(1), pages 15-26, Spring.
    8. Ingo Vogelsang & Jorg Finsinger, 1979. "A Regulatory Adjustment Process for Optimal Pricing by Multiproduct Monopoly Firms," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 157-171, Spring.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Carlos F. Alves & Cristina Barbot, 2010. "Does market concentration of downstream buyers squeeze upstream suppliers’ market power?," FEP Working Papers 387, Universidade do Porto, Faculdade de Economia do Porto.
    2. Angela S. Bergantino & Etienne Billette De Villemeur & Annalisa Vinella, 2011. "Partial Regulation in Vertically Differentiated Industries," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 13(2), pages 255-287, April.
    3. Cristina Barbot, 2002. "Does Airport Regulation Benefit Consumers?," FEP Working Papers 119, Universidade do Porto, Faculdade de Economia do Porto.
    4. Gianni De Fraja & Alberto Iozzi, 2008. "The Quest for Quality: A Quality Adjusted Dynamic Regulatory Mechanism," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(4), pages 1011-1040, December.

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    More about this item

    Keywords

    Ramsey prices; Price cap regulation.;

    JEL classification:

    • I28 - Health, Education, and Welfare - - Education - - - Government Policy
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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