Price caps, oligopoly, and entry

Stanley Reynolds and David Rietzke ()

No 80998880, Working Papers from Lancaster University Management School, Economics Department

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.

Keywords: Price caps; oligopoly; entry; stochastic demand (search for similar items in EconPapers)
JEL-codes: D21 L13 L51 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-com, nep-ind, nep-mkt and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: Price caps, oligopoly, and entry (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:lan:wpaper:80998880

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