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Investment Incentives of a Regulated Dominant Firm

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Author Info
Biglaiser, Gary
Ma, Ching-To Albert

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Abstract

We study the investment incentives of a regulated, incumbent firm in a deregulation process. The regulator cannot commit to a long-term regulatory policy, and investment decisions are taken before optimal regulatory policies are imposed. We characterize the regulated incumbent's incentive to invest when a deregulation process is initiated and an unregulated firm enters the market as a result. The change in the marginal return to investment depends on how the investment changes the firm's virtual cost--the sum of its physical production and information costs. When the marginal return to investment increases due to deregulation, social welfare increases as a result of higher investment and more competition. Otherwise, the change in social welfare depends on the total of the effects in the fall of investment and increased competition. We also present conditions under which deregulation enhances welfare. Copyright 1999 by Kluwer Academic Publishers

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Publisher Info
Article provided by Springer in its journal Journal of Regulatory Economics.

Volume (Year): 16 (1999)
Issue (Month): 3 (November)
Pages: 215-35
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Handle: RePEc:kap:regeco:v:16:y:1999:i:3:p:215-35

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  1. Vareda, João, 2007. "Unbundling and Incumbent Investment in Quality Upgrades and Cost Reduction," FEUNL Working Paper Series wp526, Universidade Nova de Lisboa, Faculdade de Economia. [Downloadable!]
  2. repec:mop:credwp:05.07.59 is not listed on IDEAS
  3. João Vareda, 2007. "Unbundling and Incumbent Investment in Quality Upgrades and Cost Reduction," Working Papers 31, Portuguese Competition Authority. [Downloadable!]
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