Strategic Pricing and Consumer Welfare under One-Sided Price Regulation
TLDR
A study on one-sided price regulation shows it can strategically raise expected average prices and decrease consumer welfare, contrary to its intent.
Key contributions
- Analyzes a two-period pricing problem with demand uncertainty and a "no more than one price increase" rule.
- Firms strategically price high in period 1 to preserve flexibility for potential high demand in period 2.
- Finds that the regulation weakly raises expected average prices, strictly so under specific demand conditions.
- Consumer welfare decreases when expected prices rise due to regulation, and increases otherwise.
Why it matters
This paper is crucial for policymakers considering price regulations, as it demonstrates that seemingly beneficial rules can lead to unintended consequences like higher prices and reduced consumer welfare. It highlights the importance of understanding strategic firm behavior.
Original Abstract
Motivated by Germany's April 2026 fuel price regulation, in this note I study a two-period pricing problem with demand uncertainty and a rule that prohibits more than one price increase during the day. Under flexible pricing, the firm chooses the static monopoly price in each period. Under the regulation, by contrast, it may price strategically high in period 1 to preserve flexibility in period 2. I show that the regulation weakly raises expected average prices. The increase is strict when future high demand is sufficiently likely and the gap between high and low demand is large; otherwise, expected average prices are unchanged. Consumer surplus rises when expected prices do not, and decreases otherwise.
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