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Price caps, oligopoly, and entry

Research output: Contribution to journalJournal articlepeer-review

Published
<mark>Journal publication date</mark>10/2018
<mark>Journal</mark>Economic Theory
Issue number3
Volume66
Number of pages39
Pages (from-to)707-745
Publication StatusPublished
Early online date11/03/16
<mark>Original language</mark>English

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.

Bibliographic note

The final publication is available at Springer via http://dx.doi.org/10.1007/s00199-016-0963-6