The Competitive Foundations of Price Cap Regulation

Weisman Dennis L. ()
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Weisman Dennis L.: Department of Economics, Kansas State University, Manhattan, KS 66506-4001, USA

The B.E. Journal of Economic Analysis & Policy, 2023, vol. 23, issue 2, 497-513

Abstract: Price cap regulation (PCR) as commonly implemented closely approximates atomistic Cournot competition in terms of the pass-through of industry and firm-specific cost-reducing innovation when the invariance property holds. A key finding is that the aggregate pass-through of cost-reducing innovation under PCR exceeds that under Cournot, holding the number of firms constant. The welfare gains under PCR are greater than Cournot when cost-reducing innovation is endogenous, the invariance property holds and demand is highly inelastic.

Keywords: cost-reducing innovation; pass-through; price cap regulation; Cournot competition (search for similar items in EconPapers)
JEL-codes: L11 L13 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1515/bejeap-2022-0052

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