SFB 303 Discussion Paper No. A - 278
Author: Bös, Dieter
Title: Notes on Price-Cap Regulation
Abstract: This paper presents an analysis of a recently invented new
form of price regulation. An index of prices of
monopolistically supplied goods must never exceed the retail
price index minus X. The main results of the chapter are as
follows: (i) If the constant X is politically chosen, price-cap
regulation does not distort factor inputs. Hence, the
government should refrain from sophisticated economic reasoning
when choosing X. If X is measured by productivity increases,
the firm is punished for high productivity increases, which
implies undesired efficieny losses. (ii) The ideal price-cap
regulation has exogenous (= political) X and a price index of
monopolistically supplied goods which is a subindex of the
retail price index. It is shown that this regulation leads to
pricing similar to Feldstein (1972a): the consumption of
necessities is favored by relatively lower prices. (iii) In
practice, sometimes the price index of monopolistically
supplied goods is calculated on the basis of revenue weights.
This leads to serious distortions of the pricing structure.
However, as we show, a simple remedy for these dist ortions is
the use of revenue weights which relate to the base period of
the retail price index. Then, once again, Feldstein prices are
obtained.
Keywords:
JEL-Classification-Number:
Creation-Date: January 1990
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