Price cap regulation in the Mexican telephone industry

This paper presents a model to analyze price cap regulation of the Mexican telephone industry. There is a vertically integrated firm that is a monopolist in the local service market and a duopolist in the long-distance service market. A regulator sets the access price and a price cap on the basket of final services provided by the integrated firm. We show that this type of price cap can increase the profits of this firm in the downstream market. Moreover, this constraint can actually increase its overall profits and reduce the profits of the downstream rival.