Price cap regulation with limited commitment

Matthieu Bouvard () and Bruno Jullien ()
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Matthieu Bouvard: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, TSM - Toulouse School of Management Research - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - CNRS - Centre National de la Recherche Scientifique - TSM - Toulouse School of Management - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse
Bruno Jullien: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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Abstract: We consider the price-cap regulation of a monopolistic network operator when the regulator has limited commitment. Operating the network requires xed investments and the regulator has the opportunity to unilaterally revise the price cap at random times. When the regulator maximizes consumer surplus, he has an incentive to lower the price cap once the operator's xed investments are sunk. This hold-up problem gives rise to two types of ineciencies. In one type of equilibrium, the operator breaks even but strategically under-invests to induce the regulator to maintain the price cap. In another type of equilibrium the operator makes strictly positive prots and periods of high investment and high prices are followed by periods of low prices and capacity decline. Overall, the model suggests that the regulator's lack of commitment limits the deployment of network infrastructures.

Date: 2025-02
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