To analyse the implications of signs of reform modification, stoppage or reversal, such as price controls, that have emerged in many developing economies, it is necessary to understand their efficiency consequences. This paper aims to study the effect of price interventions in imperfectly competitive product markets, to investigate whether reforms reversals are necessarily harmful.
The model assumes firm set prices and face sunk costs of entry.
The paper shows that a minimum price can induce a Pareto improvement, by preventing price wars and encouraging entry. The result is supported by empirical evidence from some developed economies, holds when sunk cost vanishes, and is robust to some extensions. A fixed price may be optimal in the environment investigated.
The results may be of interest to theorists and policy-makers interested in imperfectly competitive markets.
The author is indebted to Manipushpak Mitra and Prabal Roy Chowdhury for many helpful comments. The author is also grateful to Sugata Marjit and Anjan Mukherji for useful discussions. All errors are mine alone.
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