Strategic Choice of the Price Structure and Entry Deterrence Under Price Cap Regulation

20 Pages Posted: 9 Oct 2004

See all articles by Alberto Iozzi

Alberto Iozzi

Universita degli Studi di Roma

Marco Fioramanti

Parliamentary Budget Office (PBO)

Abstract

This paper shows that a price-capped firm under the threat of entry in some of the markets it serves can strategically manipulate its price structure to deter entry. In doing so, the regulated firm uses the price cap constraint as a commitment device to an aggressive pricing behaviour in case of entry. A (dynamic) price cap generally entails that the prices allowed today are a function of the previous-period prices and that the tighter is the constraint on each price, the larger is the quantity sold of this good in the previous period. Hence, the regulated firm may strategically choose its price structure before entry to place a tighter regulatory control on the prices set in the (potentially) competitive markets and to make it optimal to charge in these markets - in case of entry - prices so low that entry is unprofitable.

Suggested Citation

Iozzi, Alberto and Fioramanti, Marco, Strategic Choice of the Price Structure and Entry Deterrence Under Price Cap Regulation. Bulletin of Economic Research, Vol. 56, No. 4, pp. 333-352, October 2004. Available at SSRN: https://ssrn.com/abstract=598365

Alberto Iozzi (Contact Author)

Universita degli Studi di Roma ( email )

Via Columbia n.2
Rome, rome 00100
Italy
39 06 7259 5923 (Phone)
39 06 204 02 19 (Fax)

Marco Fioramanti

Parliamentary Budget Office (PBO) ( email )

Palazzo del Seminario (S. Macuto)
via del Seminario, 76
Roma, 00186
Italy

Register to save articles to
your library

Register

Paper statistics

Downloads
8
Abstract Views
893
PlumX Metrics