Tighter Price Cap Regulation on Consumer Surplus and Utility
Kang, Weisman, and Zhang (2000) demonstrated that, under a tighter price cap, consumer welfare increases with the independence of demands. Conversely, the tighter price cap may negatively impact consumer welfare in situations involving interdependent demands. This paper identifies an overlooked property of Kang et al. (2000), namely, that the cross-price effects should be symmetrical without an income effect and demand functions of a Hicksian type. This paper reveals the invariant conclusion that consumers always benefit from a tighter price cap. Besides, it further derives the effects of the tighter price cap on consumer utility, and concludes that the net price elasticity of demand is the key to the effect of the average revenue constraint.
Tighter Average Revenue Regulation Can Reduce Consumer Welfare
A monopolist producing for two markets is subject to an average revenue constraint, a form of regulation which is relevant to some U.K. utilities. Where marginal costs of serving the two markets differ, tighter regulation may cause one of the prices to rise as shown by I. Bradley and C. Price (1988). A simple linear example demonstrates that total consumer surplus may fall as regulation becomes more stringent. Copyright 1995 by Blackwell Publishing Ltd.
Welfare effects of pricing in anticipation of Laspeyres price‐cap regulation: an example
A monopolist in a simple two-period model knows that a price cap will be imposed on a Laspeyres index of the firm's prices in the second period. (Tariff basket regulation is relevant to some UK utilities.) A simple example is developed to study the welfare changes that result from strategic weight manipulation by the firm as a consequence of its ability to adjust first-period revenue shares and interperiod price relatives. Uniform regulation requiring an equal percentage reduction in all of the regulated firm's prices provides a natural standard for comparison. One particular configuration of parameters induces identical pricing and welfare under the two forms of regulation in the example. Otherwise, compared with uniform regulation in the example, Laspeyres index regulation raises producer welfare but reduces consumer welfare in the first period and may also reduce consumer welfare in the second period. A numerical illustration shows that total welfare may also be lower under Laspeyres regulation.