A note on price caps with demand uncertainty, quantity precommitment and disposal

Abstract

Since Littlechild (1983)'s report, price cap regulation has been regarded as an effective instrument to mitigate market power when precise information about cost and demand is available. Earle, Schmedders and Tatur (2007) establishes that the comparative static properties of price caps that hold when the demand is deterministic fail for a generic stochastic demand schedule. This note concerns the validity and interpretation of this result in a setting in which firms choose how much to produce ex-ante, but then upon observing the realization of demand choose how much of their output to supply, freely disposing of the output it does not supply.