Short Term and Long Term Effects of Price Cap Regulation

Gianni De Fraja () and Alberto Iozzi ()

Discussion Papers from Department of Economics, University of York

Abstract: This paper uses a very simple example (two goods, linear symmetric demand and cost) to study the effects of the price cap regulatory mechanism. We show that if a given price vector is preferred (using current welfare as the criterion) to another, then it is not necessarily the case that it is also preferred in the long run (using the presented discounted value of welfare as the criterion). The relationship between current welfare and profit and therefore the firm's incentive to bargain for a given price vector depend on the specific details of the mechanism considered.

Keywords: Ramsey prices; Price cap regulation. (search for similar items in EconPapers)
JEL-codes: I28 D63 (search for similar items in EconPapers)
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