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Asymmetric equilibria under price cap regulation

Yasunori Okumura ()

Journal of Economics, 2017, vol. 121, issue 2, 133-151

Abstract: Abstract This study analyzes the effects of a price-cap regulation on market outcomes in Cournot and Stackelberg duopolies. Although two firms are ex-ante identical, there are asymmetric Cournot equilibria as well as the symmetric equilibrium under the price-cap regulation, when the price-cap level is binding. By contrast, the Stackelberg equilibrium is unique and equivalent to the most asymmetric Cournot equilibrium under a binding price-cap level. We present several comparative statics results with respect to the equilibrium outcomes. The main concern of this study is the welfare effect of a change in a price-cap level. We show that when asymmetric Cournot equilibria or the Stackelberg equilibrium are focused on, a reduction in a price-cap level may be socially harmful even if the price-cap level is more than the competitive price.

Keywords: Price-cap regulations; Cournot competition; Stackelberg competition; Asymmetric equilibria; Endogenous role (search for similar items in EconPapers)
JEL-codes: D43 L11 L51 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:kap:jeczfn:v:121:y:2017:i:2:d:10.1007_s00712-017-0521-0