Production under uncertainty: a characterization of welfare enhancing and optimal price caps

We analyze the effect of price caps on equilibrium production and welfare in oligopoly under demand uncertainty. We find that high price caps always increase production and welfare as compared to the situation without price cap. Price caps close to marginal cost may lead to zero production, depending on the nature of uncertainty. We characterize the optimal price cap and show that typically, the optimal price cap is bounded away from marginal cost.

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Year of publication:	2008
Authors:	Grimm, Veronika ; Zoettl, Gregor
Publisher:	Nürnberg : Friedrich-Alexander-Universität Erlangen-Nürnberg, Institut für Wirtschaftspolitik und Quantitative Wirtschaftsforschung (IWQW)
Subject:	Anreizregulierung \| Produktion \| Entscheidung bei Unsicherheit \| Nachfrage \| Oligopol \| Nash-Gleichgewicht \| Wohlfahrtseffekt \| Theorie \| Demand uncertainty \| Cournot competition \| price caps

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Series:	IWQW Discussion Papers ; 02/2008
Type of publication:	Book / Working Paper
Type of publication (narrower categories):	Working Paper
Language:	English
Other identifiers:	612461998 [GVK] hdl:10419/29551 [Handle] RePEc:zbw:iwqwdp:022008 [RePEc]
Classification:	D43 - Oligopoly and Other Forms of Market Imperfection ; L13 - Oligopoly and Other Imperfect Markets ; D41 - Perfect Competition ; D42 - Monopoly ; D81 - Criteria for Decision-Making under Risk and Uncertainty
Source:	EconStor

Persistent link: https://www.econbiz.de/10010299749