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Economic Theory

, Volume 66, Issue 3, pp 707–745 | Cite as

Price caps, oligopoly, and entry

  • Stanley S. Reynolds
  • David Rietzke
Research Article

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.

Keywords

Price ceiling Price cap Market power Market entry Supermodular game 

JEL Classifications

D43 L13 L51 

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Copyright information

© Springer-Verlag Berlin Heidelberg 2016

Authors and Affiliations

  1. 1.Department of Economics, Eller College of ManagementUniversity of ArizonaTucsonUSA
  2. 2.Department of Economics, Lancaster University Management SchoolLancaster UniversityLancasterUK

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