Pro‐Consumer Price Ceilings under Regulatory Uncertainty*

Abstract

We examine optimal price ceilings when the regulator is uncertain about demand and maximizes expected consumer surplus. With perfect competition, if regulatory uncertainty is large enough, then softer intervention is called for, with the price ceiling set at a relatively high level compared with a full information scenario. In an imperfectly competitive setting where symmetric firms compete in supply functions, with large enough uncertainty, the optimal ceiling increases with the degree of competition, so greater competitive pressure justifies less restrictive regulation. Under perfect competition, we also determine a cut‐off level of rationing efficiency below which a price ceiling should not be used.

Should the State Control Tariffs?

“…Engelmann & Müller (2011) the effect of a price ceiling is harmful and can weaken competition because they can serve as collusive focal points for pricing decisions. Although controversial, the rule of price ceiling has been used in various markets because it can serve as a tool to correct inefficiencies stemming from inadequate competition, while another reason is to protect consumers' welfare (Bennett & Chioveanu, 2019).…”

“…Price ceiling has been used extensively in the utility market, where competitive pricing is usually restricted, to secure low prices for consumers (Bennett & Chioveanu, 2019). So, when consumers pay for a good or service at a lower price, of course, this will increase the consumer surplus, which in turn leads to consumer welfare as defined by Bork (1978) as the ability of consumers to fulfill their needs and fully satisfy their desires at a price they can afford.…”

“…The welfare losses caused by price increases are more significant than the welfare gains caused by falling prices (Bellemare, 2015). So this is where the role of setting the upper limit tariff is needed to protect the sharp, high price (Mckibbin et al, 2014) and secure low prices for consumers (Bennett & Chioveanu, 2019). Therefore, the regulation regarding the price ceiling is believed to increase consumer surplus (Braido & Ledo, 2018) and affect welfare under certain conditions (Rauh, 2004).…”

“…There is no doubt that high prices endanger consumers' welfare and threaten the country's economy. Besides protecting consumers, the price ceiling is also to protect the country's economy (Bennett & Chioveanu, 2019;Edlin, 2010).…”