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The Competitive Foundations of Price Cap Regulation

Authors
  • Weisman, Dennis L.
Type
Published Article
Journal
The B.E. Journal of Economic Analysis & Policy
Publisher
De Gruyter
Publication Date
Mar 30, 2023
Volume
23
Issue
2
Pages
497–513
Identifiers
DOI: 10.1515/bejeap-2022-0052
Source
De Gruyter
Keywords
Disciplines
  • Research Article
License
Yellow

Abstract

Price cap regulation (PCR) as commonly implemented closely approximates atomistic Cournot competition in terms of the pass-through of industry and firm-specific cost-reducing innovation when the invariance property holds. A key finding is that the aggregate pass-through of cost-reducing innovation under PCR exceeds that under Cournot, holding the number of firms constant. The welfare gains under PCR are greater than Cournot when cost-reducing innovation is endogenous, the invariance property holds and demand is highly inelastic.

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