On Price Caps Under Uncertainty

28 Pages Posted: 14 Jun 2006

See all articles by Karl Schmedders

Karl Schmedders

University of Zurich

Robert Earle

CRA International

Tymon Tatur

Princeton University - Department of Economics

Date Written: February 2006

Abstract

This paper shows how standard arguments supporting the imposition of price caps break down in the presence of demand uncertainty. In particular, though in the deterministic case the introduction or lowering of a price cap (above marginal cost) results in increased production, increased total welfare, decreased prices, and increased consumer welfare, we show that all of the above comparative statics predictions fail for generic uncertain demand functions. For example, for price caps su ciently close to marginal cost, a decrease in the price cap always leads to a decrease in production and total welfare under certain mild conditions. Under stronger regularity assumptions, all of the monotone comparative statics predictions from the deterministic case also do not hold or a generic uncertain demand if we restrict attention to price caps in an arbitrary fixed interval (as long as the price caps are binding for some values in that interval).

Keywords: Price caps, demand uncertainty, monotone comparative statics

Suggested Citation

Schmedders, Karl and Earle, Robert and Tatur, Tymon, On Price Caps Under Uncertainty (February 2006). Available at SSRN: https://ssrn.com/abstract=908577 or http://dx.doi.org/10.2139/ssrn.908577

Karl Schmedders (Contact Author)

University of Zurich ( email )

Moussonstrasse 15
Z├╝rich, CH-8044
Switzerland
+41 (0)44 634 3770 (Phone)

Robert Earle

CRA International ( email )

2125 E. Orange Grove Blvd.
Pasadena, CA 91104
United States

Tymon Tatur

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

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