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Optimal Pricing and Entry Rules When a Regulated Dominant Firm Faces a Competitive Fringe

Kevin Currier

International Advances in Economic Research, 2011, vol. 17, issue 4, 465-475

Abstract: In this paper, we study optimal regulation of a dominant firm facing an unregulated competitive fringe. First, assuming the size of the fringe is fixed, we demonstrate that the usual Ramsey Rule for second-best efficient pricing remains applicable in this context. We also examine the suitability of the Laspeyres price cap and show that it retains its desirable properties. This implies that regulators should continue to apply Laspeyres price cap regulation to the dominant firm after competition has materialized. Then, assuming that price and entry control are regulatory instruments, we characterize the efficient pricing and entry rules. We demonstrate that the free entry equilibrium number of firms will be excessive relative to the efficient number of firms, thereby providing a new Excess Entry Theorem. Finally, we suggest a modification of the Laspeyres price cap that can incentivize the regulated dominant firm to support efficient entry into the fringe. Copyright International Atlantic Economic Society 2011

Keywords: Price cap regulation; Liberalization; Excess entry; L43; L51 (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1007/s11294-011-9317-0

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