Price caps, oligopoly, and entry

Reynolds, Stanley and Rietzke, David Michael (2018) Price caps, oligopoly, and entry. Economic Theory, 66 (3). pp. 707-745. ISSN 0938-2259

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Abstract

We extend the analysis of price caps in oligopoly markets to allow for sunk entry costs and endogenous entry. In the case of deterministic demand and constant marginal cost, reducing a price cap yields increased total output, consumer welfare, and total welfare; results consistent with those for oligopoly markets with a fixed number of firms. With deterministic demand and increasing marginal cost these comparative static results may be fully reversed, and a welfare-improving cap may not exist. Recent results in the literature show that for a fixed number of firms, if demand is stochastic and marginal cost is constant then lowering a price cap may either increase or decrease output and welfare (locally); however, a welfare improving price cap does exist. In contrast to these recent results, we show that a welfare-improving cap may not exist if entry is endogenous. However, within this stochastic demand environment we show that certain restrictions on the curvature of demand are sufficient to ensure the existence of a welfare-improving cap when entry is endogenous.

Item Type:
Journal Article
Journal or Publication Title:
Economic Theory
Additional Information:
The final publication is available at Springer via http://dx.doi.org/10.1007/s00199-016-0963-6
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/2000/2002
Subjects:
ID Code:
78321
Deposited By:
Deposited On:
15 Apr 2016 08:06
Refereed?:
Yes
Published?:
Published
Last Modified:
29 Mar 2020 04:24