WELFARE EFFECTS OF STRATEGIC PRICE SETTING IN ANTICIPATION OF PRICE REGULATION

In: Bulletin of economic research, Band 45, Heft 2, S. 147-159

Abstract

ABSTRACTA single product monopolist with constant unit costs, in a simple two‐period model, is aware that price regulation will be imposed in the second period. The form of the regulation is such that price in period 2 may not exceed 100 &#x004c;̄; per cent of price in period 1, where 0 < &#x004c;̄ < 1. The period 1 price will be set higher than it would be in the absence of anticipated regulation. However, it is not always the case that pre‐regulation price will be raised as &#x004c;̄ falls. The welfare effects are crucially dependent on the form of the demand function. Under constant elasticity of demand a reduction in &#x004c;̄ will reduce both consumers' and the producer's welfare. Under linear demand, consumers benefit and the producer loses as &#x004c;̄ is reduced and the resultant effect on aggregate welfare is ambiguous.