Price-Cap Regulation of Firms that Supply Their Rivals
45 Pages Posted: 3 Apr 2017 Last revised: 10 Aug 2017
Date Written: August 7, 2017
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 be detrimental to downstream consumers because the upstream monopolist can set a high input price that will push downstream prices above the monopoly level. However, if a regulator caps the incumbent's upstream and downstream prices, consumers and firms benefit from entry. Using a dynamic extension of the model, we explore the concern that price caps may induce incumbents to forgo cost-reducing investments and dampen entrants' incentives to self-provision the input.
Keywords: Bertrand Competition, Foreclosure, Innovation, Outsourcing, Price Cap, Wholesale Pricing
JEL Classification: D43, L13, L50
Suggested Citation: Suggested Citation