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Price-Cap Regulation and Inefficiency in Relative Pricing

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  • Cowan, Simon

Abstract

The allocative efficiency properties of three price-cap schemes are compared. The scheme that uses lagged quantities in the price index and has a fixed cap works well when the firm is myopic but generates inefficient relative prices otherwise. With myopia prices are efficient and welfare is higher than with equal pricing, but the gain to the firm comes at the expense of lower consumer surplus. When the firm is not myopic pricing can be so inefficient that steady-state welfare is below the no-regulation level. Copyright 1997 by Kluwer Academic Publishers

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  • Cowan, Simon, 1997. "Price-Cap Regulation and Inefficiency in Relative Pricing," Journal of Regulatory Economics, Springer, vol. 12(1), pages 53-70, July.
    • Handle: RePEc:kap:regeco:v:12:y:1997:i:1:p:53-70
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    Cited by:

    1. Markus Brueckner & Haidi Hong & Joaquin Vespignani, 2023. "Regulation of Petrol and Diesel Prices and their Effects on GDP Growth: Evidence from China," CAMA Working Papers 2023-17, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    2. Giuseppe Coco & Claudio De Vincenti, 2002. "Can regulation increase firm's efficiency?," Working Papers in Public Economics 60, Department of Economics and Law, Sapienza University of Roma.
    3. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 27, pages 1557-1700, Elsevier.
    4. Valentini, Edilio, 2015. "Indirect taxation, public pricing and price cap regulation: A synthesis," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 9, pages 1-39.
    5. Riechmann, Christoph, 2000. "Strategic pricing of grid access under partial price-caps -- electricity distribution in England and Wales," Energy Economics, Elsevier, vol. 22(2), pages 187-207, April.
    6. Kevin Currier, 2005. "Strategic Firm Behavior Under Average-Revenue-Lagged Regulation," Journal of Regulatory Economics, Springer, vol. 27(1), pages 67-79, September.
    7. Filippini, M. & Greene, W. & Masiero, G., 2018. "Persistent and transient productive inefficiency in a regulated industry: electricity distribution," Energy Economics, Elsevier, vol. 69(C), pages 325-334.
    8. Brueckner, Markus & Haidi Hong, Haidi & Vespignani, Joaquin, 2023. "Effects of Government Regulation of Diesel and Petrol Prices on GDP Growth: Evidence from China," MPRA Paper 122869, University Library of Munich, Germany.
    9. Oliver, Matthew E., 2019. "Pricing flexibility under rate-of-return regulation: Effects on network infrastructure investment," Economic Modelling, Elsevier, vol. 78(C), pages 150-161.
    10. Kevin Currier, 2005. "Combining Pricing Bands with Price Cap Regulation," Economics Bulletin, AccessEcon, vol. 12(8), pages 1-4.

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