In developing countries undergoing liberalising economic reforms, there are typically local incumbents facing the loss of protection. Strategic lobbying by such firms for a price-capping regulatory regime is, under certain conditions, one way in which they can deter entry by competitors who are likely to be foreign firms. We show that a regulatory price can be set such that the net profit of the entrant is lower than the entry cost thus deterring entry. We then show that it is possible for the profit of the incumbent to be greater under regulation which deters entry than under unregulated duopoly. Counter-intuitively, we further discover that lobbying for regulation is to be expected where the incumbent firm is relatively cost-efficient. Finally, we consider the case of multiple incumbents threatened by entry. We observe a co-ordination problem and consider the possibility of co-operation in lobbying.We then show that such co-operation, if possible, is always preferable to non-co-operation.
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Paper provided by Centre for Economic Research, Keele University in its series Keele Economics Research Papers with number
KERP 2002/18.
Length: 24 pages Date of creation: Oct 2002 Date of revision: Handle: RePEc:kee:kerpuk:2002/18
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Find related papers by JEL classification: L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
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