Price-Cap Regulation of Firms That Supply Their Rivals

Kim Soo Jin (), Nayeem Omar A. () and Yankelevich Aleksandr ()
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Kim Soo Jin: School of Economics, Chung-Ang University, Centennial Hall (Bldg. 310), 84 Heukseok-ro, Dongjak-gu, Seoul, Korea
Nayeem Omar A.: Deloitte Tax LLP, 7900 Tysons One Place, Suite 800, McLean, VA 22102, USA
Yankelevich Aleksandr: Federal Communications Commission, Washington, D.C., USA

Review of Network Economics, 2024, vol. 22, issue 3, 145-184

Abstract: We study price-cap regulation in a market in which a vertically integrated upstream monopolist sells an essential input to a downstream competitor. In the absence of regulation, entry benefits both firms, but may harm downstream consumers because the upstream monopolist can set a high input price that would push downstream prices above the unregulated monopoly level. However, if a regulator caps the incumbent’s upstream and downstream prices, consumers and firms are better off after entry than under a price-cap monopoly. We extend our model to examine the concern that price caps may induce incumbents to forgo cost-reducing investments and dampen entrants’ incentives to self-provision the input.

Keywords: Bertrand competition; foreclosure; innovation; outsourcing; price cap; wholesale pricing (search for similar items in EconPapers)
JEL-codes: D43 L13 L50 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1515/rne-2024-0003

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