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Price-Cap Regulation of Firms that Supply Their Rivals

45 Pages Posted: 3 Apr 2017 Last revised: 10 Aug 2017

Omar A Nayeem

Deloitte Tax LLP

Aleksandr Yankelevich

Michigan State University - Quello Center

Date Written: August 7, 2017

Abstract

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

Nayeem, Omar A and Yankelevich, Aleksandr, Price-Cap Regulation of Firms that Supply Their Rivals (August 7, 2017). Quello Center Working Paper. Available at SSRN: https://ssrn.com/abstract=2943137

Omar Ahmed Nayeem

Deloitte Tax LLP

7900 Tysons One Place
Suite 800
McLean, VA 22101
United States

Aleksandr Yankelevich (Contact Author)

Michigan State University - Quello Center ( email )

406 Communication Arts Building
404 Wilson Road
East Lansing, MI 48824-1212
United States

HOME PAGE: http://aleksyankelevich.com/

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