Price Cap Regulation and Investment Incentives Under Demand Uncertainty

Price Cap Regulation Preliminary version

We study the effect of price cap regulation on investment in new capacity in an oligopolistic (Cournot) industry. We use a continuous time model with stochastic demand. The contribution of this paper is both theoretical and practical. On the theoretical side, we show that there exists an optimal price cap that maximizes investment incentives. Just as in the case of deterministic demand, the opt...

Postal Service Pricing Policies after PAEA

The Postal Accountability and Enhancement Act of 2006 (PAEA) fundamentally altered the U.S. Postal Service by introducing enhanced pricing flexibility, profit incentives, and potential antitrust liability. PAEA also mandated a change from breakeven, cost-of-service regulation where revenues must equal costs over time to price cap regulation. The Postal Service can now introduce new or modify ex...

The Effect Of Salvage Market On Strategic Technology Choice And Capacity Investment Decision Of Firm Under Demand Uncertainty

Production under Uncertainty: A Characterization of Welfare Enhancing and Optimal Price Caps

We analyze the effect of price caps on equilibrium production and welfare in oligopoly under demand uncertainty. We find that high price caps always increase production and welfare as compared to the situation without price cap. Price caps close to marginal cost may lead to zero production, depending on the nature of uncertainty. We characterize the optimal price cap and show that typically, th...

Modelling of power generation investment incentives under uncertainty in liberalised electricity markets

In this paper we discuss the problem of power generation capacity adequacy in restructured and competitive power systems and analyse potential regulatory mechanisms to ensure sufficient supply of electricity. In particular, we look at how uncertainty influences the optimal timing of investments in new power generation capacity. We formulate the power generation investment problem for a decentra...