On the effects of regulating price discrimination by a price capped firm

This paper analyses how regulation of price discrimination by a price capped firm can affect its pricing decision and the entry decision by potential competitors. We focus on two regulatory regimes. A first regime (Absolute) is given by the combination of a average price cap and an additional constraint on the absolute price level in the monopolistic markets. An alternative regime (Relative) entails, along with the price cap constraint, a constraint on the ratio between prices in monopolistic and captive markets. The main findings of the paper are as follows. When entry may only occur at a given scale, the Relative regime generally grants higher likelihood of entry at a given scale. The Relative regime is welfare-superior when, differently than the Absolute regime, is able to foster entry. However, when entry occurs under both regimes, the Absolute regime brings about (weakly) higher social welfare. This last result is reversed when the scale of entry is endogenously chosen. When entry occurs under both regimes, the Relative regime is shown to be welfare superior because this regime fosters entry at a larger scale