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Cartelization by Regulation

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  • Laffont, Jean-Jacques
  • Tirole, Jean

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. Copyright 1993 by Kluwer Academic Publishers

Suggested Citation

  • Laffont, Jean-Jacques & Tirole, Jean, 1993. "Cartelization by Regulation," Journal of Regulatory Economics, Springer, vol. 5(2), pages 111-130, June.
    • Handle: RePEc:kap:regeco:v:5:y:1993:i:2:p:111-30
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    Cited by:

    1. Bailey, James, 2016. "Can Health Spending Be Reined In through Supply Constraints? An Evaluation of Certificate-of-Need Laws," Working Papers 05192, George Mason University, Mercatus Center.
    2. Aubert, Cécile & Falck, Oliver & Heblich, Stephan, . "Subsidizing National Champions: An Evolutionary Perspective," Chapters in Economics,, University of Munich, Department of Economics.
    3. Lamar Pierce & Michael W. Toffel, 2010. "The Role of Organizational Scope and Governance in Strengthening Private Monitoring," Harvard Business School Working Papers 11-004, Harvard Business School, revised Feb 2012.
    4. James Bailey, 2018. "Does “Excess Supply” Drive Excessive Health Spending? The Case of Certificate-of-Need Laws," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 33(Winter 20), pages 91-109.
    5. Lamar Pierce & Michael W. Toffel, 2013. "The Role of Organizational Scope and Governance in Strengthening Private Monitoring," Organization Science, INFORMS, vol. 24(5), pages 1558-1584, October.
    6. McGuire, Thomas G. & Riordan, Michael H., 1995. "Incomplete information and optimal market structure public purchases from private providers," Journal of Public Economics, Elsevier, vol. 56(1), pages 125-141, January.
    7. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 27, pages 1557-1700, Elsevier.

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