Production under uncertainty: a characterization of welfare enhancing and optimal price caps

Veronika Grimm () and Gregor Zoettl

No 02/2008, FAU Discussion Papers in Economics from Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics

Abstract: We analyze the effect of price caps on equilibrium production and welfare in oligopoly under demand uncertainty. We find that high price caps always increase production and welfare as compared to the situation without price cap. Price caps close to marginal cost may lead to zero production, depending on the nature of uncertainty. We characterize the optimal price cap and show that typically, the optimal price cap is bounded away from marginal cost.

Keywords: Demand uncertainty; Cournot competition; price caps (search for similar items in EconPapers)
JEL-codes: D41 D42 D43 D81 L13 (search for similar items in EconPapers)
Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwqwdp:022008

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