The "demand side" effect of price caps: uncertainty, imperfect competition, and ration

Léautier, Thomas-Olivier (2014) The "demand side" effect of price caps: uncertainty, imperfect competition, and ration. TSE Working Paper, n. 14-460

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Official URL: http://tse-fr.eu/pub/27857

Abstract

Price caps are often used by policy makers to "regulate markets". Previous analyses have focussed on the "supply side" impact of these caps, and derived the optimal price cap, which maximizes investment and welfare. This article expands the analysis to include the "demand side" impact of price caps: when prices can no longer rise, customers must be rationed to adjust demand to available supply. This yields two new findings, that contradict previous analyses. First, the welfare-maximizing cap is higher than the capacity-maximizing cap, since increasing the cap increases gross surplus when customers are rationed. Second, in somes cases, the capacity-maximizing cap leads to lower capacity and welfare than no cap. These findings underscores the importance for policy makers to examine the impact on customers when they impose price caps. Keywords: price caps, imperfect competition, rationing, investment incentives

Item Type: Monograph (Working Paper)
Language: English
Date: 27 January 2014
Uncontrolled Keywords: price caps, imperfect competition, rationing, investment incentives
JEL codes: L13 - Oligopoly and Other Imperfect Markets
L94 - Electric Utilities
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSM Research (Toulouse), TSE-R (Toulouse)
Site: UT1
Date Deposited: 09 Jul 2014 17:41
Last Modified: 07 Mar 2018 13:22
OAI ID: oai:tse-fr.eu:27857
URI: http://publications.ut-capitole.fr/id/eprint/15812

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