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Investment Incentives of a Regulated Dominant Firm

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  • Gary Biglaiser
  • Ching-to Albert Ma

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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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Bibliographic Info

Paper provided by Boston University - Industry Studies Programme in its series Papers with number 0067.

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Date of creation: Apr 1996
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Handle: RePEc:fth:bostin:0067

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Postal: Boston University, Industry Studies Program; Department of Economics, 270 Bay Road, Boston, Massachusetts 02215.
Phone: 617-353-4389
Fax: 617-353-444
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Web page: http://www.bu.edu/econ/isp/
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Cited by:
  1. João Vareda, 2007. "Unbundling and Incumbent Investment in Quality Upgrades and Cost Reduction," Working Papers 31, Portuguese Competition Authority.
  2. Ma, Ching-to Albert, 2004. "Public rationing and private cost incentives," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 333-352, January.
  3. Debande, Olivier, 2001. "Deregulating and privatizing statutory monopolies," Journal of Economics and Business, Elsevier, vol. 53(2-3), pages 111-137.
  4. repec:mop:credwp:05.07.59 is not listed on IDEAS

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