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The Competitive Foundations of Price Cap Regulation

Author

Listed:
  • Weisman Dennis L.

    (Department of Economics, Kansas State University, Manhattan, KS 66506-4001, USA)

Abstract

Price cap regulation (PCR) as commonly implemented closely approximates atomistic Cournot competition in terms of the pass-through of industry and firm-specific cost-reducing innovation when the invariance property holds. A key finding is that the aggregate pass-through of cost-reducing innovation under PCR exceeds that under Cournot, holding the number of firms constant. The welfare gains under PCR are greater than Cournot when cost-reducing innovation is endogenous, the invariance property holds and demand is highly inelastic.

Suggested Citation

  • Weisman Dennis L., 2023. "The Competitive Foundations of Price Cap Regulation," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 23(2), pages 497-513, April.
  • Handle: RePEc:bpj:bejeap:v:23:y:2023:i:2:p:497-513:n:7
    DOI: 10.1515/bejeap-2022-0052
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    More about this item

    Keywords

    cost-reducing innovation; pass-through; price cap regulation; Cournot competition;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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