Price Regulation and Network Spillovers

TL;DR

This paper analyzes how price regulation affects monopolists in networked markets with demand spillovers, showing that certain regulations can improve consumer surplus and become welfare-neutral as spillovers increase.

Contribution

It introduces a framework linking price regulation to network centralities and demonstrates the conditions under which regulations benefit consumers.

Findings

Average-price regulation increases consumer surplus.

Banning price discrimination benefits consumers when central consumers have higher willingness to pay.

Regulations become welfare-neutral as network spillovers grow.

Abstract

We study price regulation for a monopolist operating in networked markets with demand spillovers. Achieving efficiency requires price reductions proportional to consumers' Katz-Bonacich centralities, which generally cannot be implemented by commonly used price regulations. Moreover, these regulations become asymptotically welfare neutral as spillovers grow. Nevertheless, some price regulations may still benefit consumers. In particular, average-price regulation robustly increases consumer surplus. By contrast, banning price discrimination increases consumer surplus only when more central consumers have higher intrinsic willingness to pay.