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Price caps regulation with capacity precommitment

Ana Belén Lemus Torres
Authors registered in the RePEc Author Service: Diego Moreno ()

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: In order to examine the effectiveness of price caps to regulate imperfectly competitive markets in which the demand is uncertain, we study a monopoly that makes irreversible capacity investments ex-ante, and then chooses its output upon observing the realization of demand. When capacity decisions have no precommitment value, price cap regulation remains fully effective. With capacity precommitment, however, the optimal price cap must trade off the incentives for capacity investment and capacity withholding, and is above the unit cost of capacity. While a price cap mitigates market power, it cannot eliminate inefficiencies. Capacity payments provide a useful complementary instrument.

Keywords: Monopoly; Market; Power; Price; Cap; Regulation; Capacity; Investment; Capacity; Withholding; Demand; Uncertainty (search for similar items in EconPapers)
Date: 2014-08-01
New Economics Papers: this item is included in nep-ene and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:cte:werepe:we1309

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