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The "Waterbed" Effect and Price Regulation

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  • Schiff Aaron

    (Department of Economics, University of Auckland)

Abstract

This paper investigates conditions that generate the so-called "waterbed" effect under price regulation. This is the effect whereby regulation of one price of a multiproduct firm causes one or more of its unregulated prices to change as a result of the firm's profit-maximizing behavior. A waterbed effect is shown to arise when demands and/or marginal costs are interdependent, firms use nonlinear pricing, or there is a zero-profit constraint or global price cap. Some implications for market definition, welfare analysis of regulation, non-price competition, collusion and two-sided markets are also discussed, as well as specific applications to fixed-to-mobile termination and bank overcharges.

Suggested Citation

  • Schiff Aaron, 2008. "The "Waterbed" Effect and Price Regulation," Review of Network Economics, De Gruyter, vol. 7(3), pages 1-23, September.
    • Handle: RePEc:bpj:rneart:v:7:y:2008:i:3:n:3
    DOI: 10.2202/1446-9022.1155
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    Cited by:

    1. Wissner, Matthias, 2014. "Regulation of district-heating systems," Utilities Policy, Elsevier, vol. 31(C), pages 63-73.
    2. Jullien, Bruno & Rey, Patrick & Sand-Zantman, Wilfried, 2013. "Termination fees revisited," International Journal of Industrial Organization, Elsevier, vol. 31(6), pages 738-750.
    3. Hoernig, Steffen, 2014. "The strength of the waterbed effect depends on tariff type," Economics Letters, Elsevier, vol. 125(2), pages 291-294.
    4. Calzada, Joan & Tselekounis, Markos, 2018. "Net Neutrality in a hyperlinked Internet economy," International Journal of Industrial Organization, Elsevier, vol. 59(C), pages 190-221.
    5. Dejan Trifunović & Đorđe Mitrović, 2018. "Pro-Competitive Regulatory Policies For Post-Paid And Pre-Paid Mobile Phone Markets," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 63(218), pages 85-104, July – Se.
    6. Wissner, Matthias, 2013. "Regulierungsbedürftigkeit des Fernwärmesektors," WIK Discussion Papers 381, WIK Wissenschaftliches Institut für Infrastruktur und Kommunikationsdienste GmbH.
    7. Hahn, Robert & Evans, Lewis, 2010. "Regulating Dynamic Markets: Progress in Theory and Practice," Working Paper Series 4052, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    8. Vogelsang Ingo, 2013. "The Endgame of Telecommunications Policy? A Survey," Review of Economics, De Gruyter, vol. 64(3), pages 193-270, December.
    9. Alfred Vanags, 2010. "Mobile Termination: How to Regulate or Perhaps Not to Regulate at All?," TeliaSonera Institute Discussion papers 8, Baltic International Centre for Economic Policy Studies (BICEPS);Stockholm School of Economics in Riga (SSE Riga).

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