Price-Cap Regulation of Firms That Supply Their Rivals.

Kim, Soo Jin; Nayeem, Omar A.; Yankelevich, Aleksandr

We study price-cap regulation in a market in which a vertically integrated upstream monopolist sells an essential input to a downstream competitor. In the absence of regulation, entry benefits both firms, but may harm downstream consumers because the upstream monopolist can set a high input price that would push downstream prices above the unregulated monopoly level. However, if a regulator caps the incumbent's upstream and downstream prices, consumers and firms are better off after entry than under a price-cap monopoly. We extend our model to examine the concern that price caps may induce incumbents to forgo cost-reducing investments and dampen entrants' incentives to self-provision the input.

PRICE regulation; PRICES; BUSINESS enterprises; CONSUMERS; WHOLESALE prices

Review of Network Economics, 2023, Vol 22, Issue 3, p145

1446-9022

Academic Journal

10.1515/rne-2024-0003