Optimal dynamic volume-based price regulation |
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| Institution: | 1. Toulouse School of Economics, Esplanade de l’Université 1, Toulouse 31080, France;3. Department of Economics and Business, University of Catania, C.so Italia 55, Catania 95129, Italy;4. Department of Economics and Related Studies, University of York, Heslington, York YO10 5DD, UK;5. Department of Economics/NIPE, University of Minho, Campus de Gualtar, Braga 4710-057, Portugal;6. Department of Economics, University of Bergen, Norway;1. Paris School of Economics (EHESS), PSE, 48 boulevard Jourdan, Paris 75014, France;2. CY Cergy Paris Université, CNRS, THEMA and ESSEC Business School, ESSEC Business School, 3 Avenue Bernard Hirsch, BP 50105, Cergy 95021, France;1. Department of Economics, University of Illinois, Urbana-Champaign, United States;2. Department of Economics, University of St. Gallen, Switzerland;1. Department of Economics, Norwegian School of Economics, Helleveien 30, N-5045 Bergen, Norway;2. Department of Economics and Management, University of Brescia, Via San Faustino 74b, 25100 Brescia, Italy;3. Department of Economics and Related Studies, University of York, Heslington, York YO10 5DD, UK;4. Department of Economics/NIPE, University of Minho, Campus de Gualtar, 4710-057 Braga, Portugal;5. Department of Economics, University of Bergen, Norway;1. ZEW Centre for European Economic Research and MaCCI Mannheim Centre for Competition and Innovation, Germany;2. University of Mannheim, ZEW Centre for European Economic Research, MaCCI and MISES, Germany;3. Leonard N. Stern School of Business, New York University, and CEPR, United Kingdom |
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| Abstract: | We consider a model of optimal price regulation in markets where demand is sluggish and asymmetric providers compete on quality. Using a spatial model, which is suitable to investigate the health care and education sector, we analyse within a dynamic set-up the scope for price premiums or penalties on volume. Under the assumption of symmetric cost information, we show that the socially optimal time path of quality provision off the steady state can be replicated by a simple dynamic pricing rule where the dynamic part of the rule is ex-ante non-discriminatory in the sense that the price premium or penalty on volume is common across providers, despite their differing production costs. Whether the price schedule involves a penalty or a premium on volume relates to two concerns regarding production costs and consumer benefits, which go in opposite directions. Price adjustments over time occur only through the price penalty or premium, not time directly, which highlights the simplicity and thus applicability of this regulation scheme. |
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