Environmental and Resource Economics

, Volume 61, Issue 3, pp 433–461 | Cite as

Can Poorly Informed Regulators Hinder Competition?

Article

Abstract

This paper considers an entry-deterrence game in which environmental policy is set without perfectly observing the incumbent firm’s costs. We investigate if regulators, who can have an informational advantage relative to the potential entrant, support entry-deterring practices. The paper demonstrates that, while entry-deterring equilibria only emerge under restrictive conditions when the regulator is perfectly informed, these equilibria arise under larger settings as he becomes uninformed. Furthermore, we show that the regulator is willing to support the incumbent’s entry-deterring practices regardless of his degree of information if entry costs are sufficiently high. However, when entry costs are lower, the regulator only sustains this type of practices if he is poorly informed.

Keywords

Entry deterrence Signaling Emission fees Informational advantage 

JEL Classification

D82 H23 L12 Q5 

References

  1. Bagwell K, Ramey G (1991) Oligopoly limit pricing. RAND J Econ 22:155–172CrossRefGoogle Scholar
  2. Buchanan JM (1969) External diseconomies, corrective taxes and market structure. Am Econ Rev 59:174–177Google Scholar
  3. Cho I, Kreps D (1983) Signaling games and stable equilibrium. Quart J Econ 102:179–222Google Scholar
  4. Denicolò V (2008) A signaling model of environmental overcompliance. J Econ Behav Organ 68:293–303CrossRefGoogle Scholar
  5. Espinola-Arredondo A, Munoz-Garcia F (2013) When does environmental regulation facilitate entry-deterring practices? J Environ Econ Manag 65(1):133–152CrossRefGoogle Scholar
  6. Espinola-Arredondo A, Munoz-Garcia F, Bayham J (2014) The entry-deterring effects of inflexible regulation. Can J Econ 47(1):298–324CrossRefGoogle Scholar
  7. Farrell J (1987) Information and the Coase theorem. J Econ Perspect 1(2):113–129CrossRefGoogle Scholar
  8. Greenpeace Report (2009) HFCs: a growing threat to the climate Report 58801, December.Google Scholar
  9. Harrington JE Jr (1986) Limit pricing when the potential entrant is uncertain of its cost function. Econometrica 54:429–437CrossRefGoogle Scholar
  10. Harrington JE Jr (1987) Oligopolistic entry deterrence under incomplete information. RAND J Econ 18(2):211–231CrossRefGoogle Scholar
  11. Lewis TR (1996) Protecting the environment when costs and benefits are privately known. RAND J Econ 27:819–847CrossRefGoogle Scholar
  12. Maxwell J, Briscoe F (1997) There’s money in the air: the CFC Ban and DuPont’s regulatory strategy. Bus Strateg Environ 6:276–286CrossRefGoogle Scholar
  13. Milgrom P, Roberts J (1982) Predation, reputation, and entry deterrence. J Econ Theory 27:280–312CrossRefGoogle Scholar
  14. Milgrom P, Roberts J (1986) Price and advertising signals of product quality. J Polit Econ 94:796–821CrossRefGoogle Scholar
  15. Naess E, Smith T (2009) Environmentally related taxes in Norway Statistics Norway/Division for Environmental Statistics. Report 2009/5Google Scholar
  16. Ridley David B (2008) Herding versus hotelling: market entry with costly information. J Econ Manag Strateg 17(3):607–631CrossRefGoogle Scholar
  17. Roberts MJ, Spence M (1976) Effluent charges and licenses under uncertainty. J Public Econ 5:193–208CrossRefGoogle Scholar
  18. Schoonbeek L, Vries FP (2009) Environmental taxes and industry monopolization. J Regul Econ 36:94–106CrossRefGoogle Scholar
  19. Schultz C (1999) Limit pricing when incumbents have conflicting interests. Int J Ind Organ 17:801–825CrossRefGoogle Scholar
  20. Segerson K (1988) Uncertainty and incentives for nonpoint pollution control. J Environ Econ Manag 15:87–98CrossRefGoogle Scholar
  21. Stavins RN (1996) Correlated uncertainty and policy instrument choice. J Environ Econ Manag 30(2):218–232CrossRefGoogle Scholar
  22. Thomas A (1995) Regulating pollution under asymmetric information: the case of industrial wastewater treatment. J Environ Econ Manag 28(3):357–373CrossRefGoogle Scholar
  23. Weitzman M (1974) Prices vs. quantities. Rev Econ Stud 41:477–491CrossRefGoogle Scholar
  24. Xepapadeas AP (1991) Environmental policy under imperfect information: incentives and moral hazard. J Environ Econ Manag 20:113–126CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media Dordrecht 2014

Authors and Affiliations

  • Ana Espínola-Arredondo
    • 1
  • Félix Muñoz-García
    • 2
  1. 1.School of Economic SciencesWashington State UniversityPullmanUSA
  2. 2.School of Economic SciencesWashington State UniversityPullmanUSA

Personalised recommendations