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WELFARE EFFECTS OF STRATEGIC PRICE SETTING IN ANTICIPATION OF PRICE REGULATION
Author(s) -
Law Peter J.
Publication year - 1993
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/j.1467-8586.1993.tb00562.x
Subject(s) - economics , microeconomics , welfare , price elasticity of demand , price level , monetary economics , market economy
A single product monopolist with constant unit costs, in a simple two‐period model, is aware that price regulation will be imposed in the second period. The form of the regulation is such that price in period 2 may not exceed 100 L̄; per cent of price in period 1, where 0 < L̄ < 1. The period 1 price will be set higher than it would be in the absence of anticipated regulation. However, it is not always the case that pre‐regulation price will be raised as L̄ falls. The welfare effects are crucially dependent on the form of the demand function. Under constant elasticity of demand a reduction in L̄ will reduce both consumers' and the producer's welfare. Under linear demand, consumers benefit and the producer loses as L̄ is reduced and the resultant effect on aggregate welfare is ambiguous.