Price caps, oligopoly, and entry

Abstract

We extend the analysis of price caps in oligopoly markets to allow for sunk entry costs and endogenous entry. In the case of deterministic demand and constant marginal cost, reducing a price cap yields increased total output, consumer welfare, and total welfare; results consistent with those for oligopoly markets with a fixed number of firms. With deterministic demand and increasing marginal cost these comparative static results may be fully reversed, and a welfare-improving cap may not exist. Recent results in the literature show that for a fixed number of firms, if demand is stochastic and marginal cost is constant then lowering a price cap may either increase or decrease output and welfare (locally); however, a welfare improving price cap does exist. In contrast to these recent results, we show that a welfare-improving cap may not exist if entry is endogenous.However, within this stochastic demand environment we show that certain restrictions on the curvature of demand are sufficient to ensure the existence of a welfare-improving cap when entry is endogenous.JEL Codes: D21, L13, L51

Minimum Wages, Efficiency and Welfare

“…Our paper makes a set of theoretical contributions related to analyzing concentrated markets with strategic interactions in the presence of price controls. This problem of price controls has been studied in stylized cases with symmetric firms in the case of an oligopoly setting (Molho, 1995;Reynolds and Rietzke, 2018), while others have studied capacity constraints and rationing but no price setting (e.g. de Palma, Picard, and Waddell (2007) and Ching, Hayashi, and Wang (2015)).…”

Price caps with capacity precommitment

“…(Also, Grimm and Zoettl, 2010 consider a setting in which firms may withhold capacity, but do not study the trade-offs of capacity investment and withholding, and mistakenly conclude that maximizing the expected surplus amounts to maximizing capacity.) In a similar setting, Reynolds and Rietzke (2012) study the impact of price caps in oligopolistic markets with endogenous entry, and identify conditions under which a price cap improves welfare.…”

Pro‐Consumer Price Ceilings under Regulatory Uncertainty*

“… In related models, Reynolds and Rietzke () consider endogenous entry and identify conditions under which a price cap is welfare improving, while Lemus and Moreno () explore the optimal ceiling when a monopolist pre‐commits to a capacity level before the demand is realized. …”

“…Furthermore, some of the instruments required for optimal regulation (e.g., transfers) might not be available in practice. SeeArmstrong and Sappington (2007) for discussion of practical regulatory policies, and seeCrew and Kleindorfer (2002) for more on the limitations of optimal regulation models.8 In related models,Reynolds and Rietzke (2018) consider endogenous entry and identify conditions under which a price cap is welfare improving, whileLemus and Moreno (2017) explore the optimal ceiling when a monopolist pre-commits to a capacity level before the demand is realized. 9Neven and Röller (2005) analyze how institutional settings, such as transparency and accountability, interact with the choice of an appropriate standard.…”