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Tight Average Revenue Regulation Can Be Worse Than No Regulation[Note 1. I would like to thank two anonymous referees for ...]
Author(s) -
Cowan Simon G. B.
Publication year - 1997
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/1467-6451.00035
Subject(s) - marginal revenue , revenue , economics , welfare , marginal cost , microeconomics , total revenue , marginal utility , constant (computer programming) , monetary economics , econometrics , finance , market economy , computer science , programming language
Price regulation of a multi‐market monopolist, with the cap based on average revenue, can cause welfare to be below the unregulated level. In a model with linear demands and constant but unequal marginal costs, a sufficient condition for this welfare effect is that the cap equals the average revenue that would be earned with marginal cost pricing. Relaxation of the price cap can lower all prices. Welfare with uniform pricing at the level of the price cap can be above or below the average revenue welfare level.