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This paper examines the intertemporal price cap regulation of a firm that has market power. Under uncertainty, the unconstrained firm 'waits longer' before investing or adding to capacity and as a corollary, enjoys higher prices over time than would be observed in an equivalent competitive industry. In the certainty case, the imposition of an inter-temporal price cap can be used to realise the competitive market solution; by contrast, under uncertainty, it cannot. Even if the price cap is optimally chosen, under uncertainty, the monopoly firm will generally (a) under-invest and (b) impose quantity rationing on its customers. © Royal Economic Society 2004.
Author(s): Dobbs IM
Publication type: Article
Publication status: Published
Journal: Economic Journal
Year: 2004
Volume: 114
Issue: 495
Pages: 421-440
ISSN (print): 0013-0133
ISSN (electronic): 1468-0297
Publisher: Wiley-Blackwell
URL: http://dx.doi.org/10.1111/j.1468-0297.2004.00215.x
DOI: 10.1111/j.1468-0297.2004.00215.x
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