Abstract
This paper formalizes and studies the argument of cartelization of industries through captured agencies. An agency can affect entry by a producer of a differentiated commodity in the market of a regulated natural monopoly through the manipulation of information it produces about the benefit of entry. Entry may be socially efficient because it enhances product diversity, or inefficient because it creates a duplication of fixed costs. We first show that because of informational asymmetries the agency will tend to prohibit entry. However with a rational political principal, the threat of regulatory capture increases the likelihood of entry. The effect of regulatory capture on incentives in the natural monopoly is also studied and the results are discussed and extended in various ways.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Adams, W. 1975.Public Utility Regulation, edited by W. Sichel and T. Gies, Chapter 2. Lexington: Lexington Books.
Burnett, W., and W. Kovacic. 1989. “Reform of United States Acquisition Policy: Competition, Teaming Agreements, and Dual Sourcing.”Yale Journal of Regulation 6:249–317.
Demski, J., D. Sappington, and P. Spiller. 1987. “Managing Supplier Switching.”Rand Journal of Economics 18:77–97.
Kahn, A. 1988.The Economics of Regulation. Cambridge: MIT Press.
Laffont, J.J., and J. Tirole. 1986. “Using Cost Observation to Regulate Firms.”Journal of Political Economy 94:614–641.
Laffont, J.J., and J. Tirole. 1991. “The Politics of Government Decision-Making: A Theory of Regulatory Capture.”Quarterly Journal of Economics 106:1089–1127.
Laffont, J.J., and J. Tirole. 1990a. “The Politics of Government Decision-Making: Regulatory Institutions.”Journal of Law, Economics and Organizations 6:1–32.
Laffont, J.J., and J. Tirole. 1990b. “The Regulation of Multiproduct Firms: I: Theory.”Journal of Public Economics 43:1–66.
Marx, K. 1867.Capital: A Critique of Political Economy, edited by Frederick Engels (translation of the third German Edition by S. Moore and E. Aveling). New York: International Publishers.
Scharfstein, D. 1988. “The Disciplinary Role of Takeovers.”Review of Economic Studies 55:185–200.
Stigler, G. 1971. “The Theory of Economic Regulation.”Bell Journal of Economics and Management Science 2 (Spring):3–21.
Subcommittee on Economy in Government Report. 1969.The Economics of Military Procurement. Joint Executive Committee, Washington, DC, G.O.P.
Yuspeh, L. 1976. “A Case for Increasing the Use of Competitive Procurement in the Department of Defense.” InBidding and Auctioning for Procurement and Allocation, edited by Y. Amihud. New York: New York University Press.
Author information
Authors and Affiliations
Consortia
Rights and permissions
About this article
Cite this article
Laffont, JJ., Tirole, J. & Idei, Gremaq, and Ceras. Cartelization by regulation. J Regul Econ 5, 111–130 (1993). https://doi.org/10.1007/BF01065361
Issue Date:
DOI: https://doi.org/10.1007/BF01065361