Gang Chen and Zicai Xu. Effects of Price Regulation on Product Quality of Monopolistic Firm: A Theoretical Model. Dynamic Systems and Applications 29 (2020) No. 10, 2970 – 2984

https://doi.org/10.46719/dsa202029104

ABSTRACT.
Effects of price regulation on product quality of monopolistic firm have been always a hotspot in regulatory economics. However, the one-sided conclusion drawn by existing theoretical researches quite disaccords with the non univocal findings from empirical literatures. By the optimization method in mathematics, this paper presents a quality decision model of monopolistic firm which reveals the diverse effects and its inner economic mechanism how price regulation affects product quality as well as social welfare. The results show that the impact of price regulation on firm’s product quality cannot be univocal, but is likely negative, positive, or naught, which depends on the characteristics of consumer demand for quality as well as the relative size of regulatory price and firm cost. As for social welfare, it declines when price regulation results in product quality deterioration, but changes ambiguously when quality improves, and increases when quality maintains unchanged. In contrast to existing theoretical literatures, the model of this paper has more fruitful results. This might explain the non univocal empirical evidence.

Keywords: Price regulation; Effects on quality; Optimization method; Theoretical model; Economic mechanism.