Privatization, price regulation, and market entry. An asymmetric multistage duopoly model (Q914533)

A privatized firm, which inherited a high capacity from its public past, faces a potential entrant. The paper deals with the subgame perfect equilibria of a four-stage game with perfect foresight in which the firms first set their capacity and then prices, both sequentially. A further section analyzes the implications of a price-cap regulation which is imposed on the privatized incumbent. It is shown, inter alia, that a binding price constraint does not necessarily lead to an increase in capacity and output.