Unintended and persistent consequences of regulation: The case of cable television provision in Canada

Economic regulation can have unintended consequences that are detrimental to subsequent policy change if the regulatory regime has institutionalized certain aspects of firm behaviour. For example, in a post-deregulation environment, unforeseen scalerelated phenomenon may persist in an industry that was formerly regulated according to firm size. Unfortunately, in many industries such effects can be difficult to identify. We examine measures of efficient scale for annual cross-sectional data from the cable television industry in Canada from 1992-1996, a time when the industry was being partially deregulated. Due to sample size problems among some of the size categories of interest, we estimate efficient scale in the industry using both a translog cost function and a non-parametric efficiency estimation method. We find that well after partial deregulation, the points of efficient scale in the industry can still be found at those size categories specified in the repealed rules. We label this phenomenon “regulatory persistence†and offer an explanation specific to this industry: the technology of cable television provision encouraged optimal firm sizes corresponding to the size categories found in the regulatory regime. These findings are further evidence of the existence of complex incentive structures between firms and regulators in the cable television industry