Fairness Regulation of Prices in Competitive Markets.

The article focuses on the economic impacts of price fairness regulation aimed at addressing the loyalty penalty—a pricing strategy where firms charge higher prices to loyal customers while offering lower prices to attract new ones. Using a theoretical duopoly model with two symmetric markets and consumer loyalty, the study finds that the effects of such regulation depend critically on the intensity of market competition. When competition is intense, mild price fairness regulation can reduce cutthroat competition, leading to Pareto improvements that benefit both firms and consumers. Conversely, when competition is weak, fairness regulation may strengthen firms' monopoly power, inducing collusive high prices that harm consumers and social welfare. Extensions of the model reveal that regulating relative price discounts can cause price inflation, and that fairness regulation may widen profit gaps between large incumbents and smaller entrants. The authors propose a two-pronged policy combining price fairness constraints with price caps to mitigate negative effects like collusion, highlighting the importance of tailoring regulatory intensity and form to market conditions.