The paper analyzes the impact of price caps agreed upon by industry participants. Price caps, like mergers, allow firms to solve Cournot's multiple marginalization problem; but unlike mergers, they do not stifle price competition in case of substitutes or facilitate foreclosure in case of complements. The paper first demonstrates this for non-repeated interaction and general demand and cost functions. It then shows that allowing price caps has no impact on investment and entry in case of substitutes. Under more restrictive assumptions, the paper finally generalizes the insights to repeated price interaction, analyzing coordinated effects when goods are not necessarily substitutes.
Price caps; information-light regulation; tacit collusion; complements and substitutes; mergers; foreclosure; joint marketing agreements; coopetition;
- D43: Oligopoly and Other Forms of Market Imperfection
- L24: Contracting Out • Joint Ventures • Technology Licensing
- L41: Monopolization • Horizontal Anticompetitive Practices
- O34: Intellectual Property and Intellectual Capital
Journal of Political Economy, 2019, forthcoming