Journal of Political Economy Vol. 99 No. 3 1991
Irreversible Investment with Price Ceilings
Abstract
A model of irreversible investment in a competitive industry under demand uncertainty is developed. In the absence of restrictions, investment by itself will keep the price from rising above a natural ceiling that exceeds the long-run average cost by an option value factor. When a lower ceiling is imposed, investment is triggered only by the observation of an even higher "shadow" price. As the imposed ceiling is reduced to the long-run average cost, this shadow price goes to infinity and investment ceases completely. Because investment is depressed, a tighter price ceiling generally leads to a higher long-run average price.
- Volume
- 99
- Issue
- 3
- Pages
- 541-557
- Sources
- bibtex:phds-export.bib