In recent years, the OPEX-CAPEX-incentive-bias (short: CAPEX-bias) received renewed attention in regulatory practice. A CAPEX-bias occurs when the OPEX solution is the more efficient approach, but regulation sets distorted incentives to choose the CAPEX solution. This paper presents a promising...

This note analyzes a simple Cournot model where firms choose outputs and capacities facing varying demand and price-cap regulation. We find that binding price caps set above long-run marginal cost increase (rather than decrease) aggregate capacity investment