Pricing Discretion and Price Regulation in Competitive Industries |
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Authors: | Alberto Iozzi Roberta Sestini Edilio Valentini |
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Affiliation: | (1) Dip. SEFEMEQ, Università di Roma “Tor Vergata”, Via Columbia 2, I-00133 Rome, Italy;(2) Dip. di Informatica e Sistemistica “A. Ruberti”, Università di Roma “La Sapienza”, Via Buonarroti 12, I-00185 Rome, Italy;(3) Dip. di Economia e Storia del Territorio, Università “G. D’Annunzio” di Chieti-Pescara, Viale Pindaro 42, I-65127 Pescara, Italy |
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Abstract: | Price capped firms enjoy a large degree of pricing discretion, which may harm customers and competition. We study two alternative regulatory regimes to limit it: the first regime (Absolute) places a fixed upper limit to the prices charged in captive markets, while the other regime (Relative) constrains the captive prices relatively to the competitive ones. Under the Relative regime, captive prices are only weakly lower and competitive prices are always higher than under the Absolute regime. However, the number of competitors and/or their output may be higher under the Relative regime. While the effects on aggregate welfare are ambiguous, there is some evidence that the Relative regime is more likely to increase consumers’ surplus and social welfare the more efficient are the competitors. |
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Keywords: | Price regulation Pricing discretion Competition |
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