Price Caps as Welfare-Enhancing Coopetition

Patrick Rey and Jean Tirole

Journal of Political Economy, 2019, vol. 127, issue 6, 3018 - 3069

Abstract: The paper analyzes the impact of price caps agreed upon by industry participants. Price caps, like mergers, allow firms to solve Cournot’s multiple-marginalization problem, but unlike mergers, they do not stifle price competition in case of substitutes or facilitate foreclosure in case of complements. The paper first demonstrates this for nonrepeated interaction and general demand and cost functions. It then shows that allowing price caps has no impact on investment and entry in case of substitutes. Under more restrictive assumptions, the paper finally generalizes the insights to repeated price interaction, analyzing coordinated effects when goods are not necessarily substitutes.

Date: 2019
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Related works:
Working Paper: Price caps as welfare-enhancing coopetition (2019)
Working Paper: Price Caps as Welfare-Enhancing Coopetition (2018)
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