Optimal price regulation in a growth model with monopolistic suppliers of intermediate goods

Lewis Evans, Neil Quigley and Jie Zhang

Canadian Journal of Economics, 2003, vol. 36, issue 2, 463-474

Abstract: In this paper we investigate the trade-off faced by regulators who must set a price for an intermediate good somewhere between the marginal cost and the monopoly price. We utilize a growth model with monopolistic suppliers of intermediate goods. Investment in innovation is required to produce a new intermediate good. Marginal cost pricing deters innovation, while monopoly pricing maximizes innovation and economic growth at the cost of some static inefficiency. We demonstrate the existence of a second-best price above the marginal cost but below the monopoly price, which maximizes consumer welfare. Simulation results suggest that substantial reductions in consumption, production, growth, and welfare occur where regulators focus on static efficiency issues by setting prices at or near marginal cost.

JEL-codes: D42 D61 D92 O38 (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (22)

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