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Optimal dynamic volume-based price regulation

Michele Bisceglia, Roberto Cellini (), Luigi Siciliani () and Odd Rune Straume ()

International Journal of Industrial Organization, 2020, vol. 73, issue C

Abstract: We consider a model of optimal price regulation in markets where demand is sluggish and asymmetric providers compete on quality. Using a spatial model, which is suitable to investigate the health care and education sector, we analyse within a dynamic set-up the scope for price premiums or penalties on volume. Under the assumption of symmetric cost information, we show that the socially optimal time path of quality provision off the steady state can be replicated by a simple dynamic pricing rule where the dynamic part of the rule is ex-ante non-discriminatory in the sense that the price premium or penalty on volume is common across providers, despite their differing production costs. Whether the price schedule involves a penalty or a premium on volume relates to two concerns regarding production costs and consumer benefits, which go in opposite directions. Price adjustments over time occur only through the price penalty or premium, not time directly, which highlights the simplicity and thus applicability of this regulation scheme.

Keywords: Price regulation; Quality; Differential games (search for similar items in EconPapers)
JEL-codes: C73 I11 I14 L13 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:73:y:2020:i:c:s0167718720300989

DOI: 10.1016/j.ijindorg.2020.102675

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