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Pro-Consumer Price Ceilings under Regulatory Uncertainty

John Bennett () and Ioana Chioveanu ()

MPRA Paper from University Library of Munich, Germany

Abstract: We examine optimal price ceilings when the regulator is uncertain about demand and supply conditions and maximizes expected consumer surplus. We consider both a perfectly competitive benchmark and imperfectly competitive settings where symmetric firms compete in supply functions. Our analysis indicates that regulatory uncertainty does not eliminate the scope for intervention with a price ceiling. Instead, sufficient uncertainty calls for softer intervention, with the price ceiling set at a relatively high level. We formalize the relationship between competitive pressure and the optimal price ceiling and show that, if uncertainty is great enough, the optimal price ceiling is increasing in the degree of competition, so that greater competitive pressure justifies less restrictive regulatory intervention. For the perfectly competitive case, we also explore how the optimal price ceiling is related to the level of rationing efficiency, pinning down a cut-off level of efficiency below which a price ceiling should not be used.

Keywords: price regulation; consumer surplus; uncertainty (search for similar items in EconPapers)
JEL-codes: D4 D8 L5 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mkt and nep-reg
Date: 2016
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Journal Article: Pro‐Consumer Price Ceilings under Regulatory Uncertainty (2019) Downloads
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