Short term and long term properties of price cap regulation

This paper uses a very simple example (two goods, linear symmetric and independent demand and cost) to study the effects of the price cap regulatory mechanism. We show that if a given price vector is preferred (using current welfare as the criterion) to another, then it is not necessarily also preferred in the long run (using the presented discounted value of welfare as the criterion). The relationship between current welfare and profit and therefore the firm’s incentive to bargain for a given price vector depend on the specific details of the mechanism considered.