Price caps, oligopoly, and entry

Stanley S. Reynolds, David Rietzke

Research output: Contribution to journalArticle

8 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)707-745
Number of pages39
JournalEconomic Theory
Volume66
Issue number3
DOIs
StatePublished - Oct 1 2018

Keywords

  • Market entry
  • Market power
  • Price cap
  • Price ceiling
  • Supermodular game

ASJC Scopus subject areas

  • Economics and Econometrics

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