# Do price controls increase competition?

Question: Is there any way to show that price controls might increase competition?

I'm trying to find a way, any way, that price controls might lead to an increase in competition between companies. I've done a few hours of research, mostly just reading long PDFs, but I'm having difficulty finding any sort of analysis that shows that price controls increase competition among companies.

The best I've gotten is that some people argue that price controls are a kind of competition law (?) which are designed to increase competition. But that's not really a warrant for the question.

• "some people argue that price controls are a kind of competition law (?) which are designed to increase competition" Kindly include some sources for this. – Giskard Oct 27 '18 at 3:36
• Do the price controls keep the prices lower or higher than they would be otherwise? If this is a homework question, please go back to the source and find an explicit verification of your response. There are certainly real life examples of price controls designed either way. Also, what does it mean to increase competition? How do you measure the amount of competition? – Brythan Oct 27 '18 at 6:57
• @denesp It’s a PDF document I’m reading. I’m not sure how I should link it, but it’s by Kigmodo and is about Price Controls and the effect it has on competition. – Frank W. Oct 27 '18 at 18:59
• @Brythan I’m thinking of price ceilings. I’m in debate and I need to do a bunch of research on price controls. – Frank W. Oct 27 '18 at 19:00

A classic example, related to the point made by @GuyLouzon, is access pricing in network industries.

A telephone network is a natural monopoly. The modern approach to regulating this market is to force the monopolist owner of the network infrastructure to allow competing telecomms services firms to buy access to the network. This allows those rivals to offer competing retail telephone services using the monopolist's infrastructure rather than having to build their own.

The price that the incumbent charges firms for network access is regulated. Ensuring that monopolist does not set the network access price too high means that downstream firms can profitably buy access and thereby enter the market for retail telecommunications services. While the fundamental natural monopoly problem has not gone away, regulating the access price at least helps to ensure the retail telehone service market is not also monopolised.

One can easily build a model of this situation. Suppose that retail telephone firms earn profit $$\pi_n$$ when there are $$n$$ firms in the market. Make the standard assumption that $$n\pi_n\leq m\pi_m$$ whenever $$n>m$$ (industry profit is lower when there is more competition).

The wholesale firm sets a price, $$p$$, for access to its network. Firms will choose to buy access so long as $$\pi_n>p$$. The highest price the monopolist can charge if it wants to serve $$n$$ firms is therefore $$\pi_n$$. Thus, the monopolist can serve one firm and earn profit $$\pi_1$$, serve two firms and earn profit $$2\pi_2$$, serve 3 firms and earn $$3\pi_3$$, etc. Because $$n\pi_n$$ is decreasing in $$n$$, the monopolist optimally sets $$p=\pi_1$$ and grants access to a single firm, inducing a downstream monopoly.

A policy that constrains $$p<\pi_2$$ would, on the other hand, induce more than one firm to enter downstream and thus result in more downstream competition than when the price cap is not in place.

• Is there any game theory model to describe the telecom wholesale market equilibrium? – Guy Louzon Oct 27 '18 at 15:19

You're question should derive from specific markets, that before price control, are not competitive enough (or at all)

After we assume that the market in question is not competitive, the next question is what prices should be controlled to lower entrance barriers

Here's the catch: higher than competitive prices should motivate additional players to enter the market with lower prices, thus lowering, until the competitive price is reached

A place where price control can take place to increase competition, is on wholesale prices, that might be a barrier as being to costly for new potential competitors.

The conclusion is that the wholesale market by itself might be monopolistic So price control, won't directly encourage competition, but indirectly, there might such cases

If your non-regulated equilibrium is characterized by deterrence pricing, i.e. one firm is able to credibly threaten to undercut any price of a market entrant, then setting a minimum price will ensure that entering the market is profitable. This increases the number of firms, i.e. competition. However, competition will not be in the price domain but in quality.