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Can Poorly Informed Regulators Hinder Competition?

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  • Ana Espinola-Arredondo

    ()

  • Felix Munoz-Garcia

    (School of Economic Sciences, Washington State University)

Abstract

This paper considers an entry-deterrence game in which environmental policy is set without perfectly observing the incumbent firm's costs. We investigate if regulators, who can have an informational advantage relative to the potential entrant, support entry-deterring practices. The paper demonstrates that, while entry-deterring equilibria only emerge under restrictive conditions when the regulator is perfectly informed, these equilibria arise under larger settings as he becomes uninformed. Furthermore, we show that the regulator is willing to support the incumbent?s entry-deterring practices regardless of his degree of information if entry costs are sufficiently high. However, when entry costs are lower, the regulator only sustains this type of practices if he is poorly informed.

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File URL: http://faculty.ses.wsu.edu/WorkingPapers/AnaEspinola/WP2013-3.pdf
File Function: First version, 2013
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Bibliographic Info

Paper provided by School of Economic Sciences, Washington State University in its series Working Papers with number 2013-3.

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Length: 34 pages
Date of creation: Feb 2013
Date of revision:
Handle: RePEc:wsu:wpaper:espinola-15

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Related research

Keywords: Entry deterrence; Signaling; Emission fees; Informational advantage;

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References

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  1. David B. Ridley, 2009. "Herding versus Hotelling: Market Entry with Costly Information," Levine's Working Paper Archive 814577000000000174, David K. Levine.
  2. Paul Milgrom & John Roberts, 1980. "Predation, Reputation, and Entry Deterrence," Discussion Papers 427, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. de, Vries Frans & Schoonbeek, Lambert, 2008. "Environmental Taxes and Industry Monopolization," Stirling Economics Discussion Papers 2008-19, University of Stirling, Division of Economics.
  4. Kyle Bagwell & Garey Ramey, 1989. "Oligopoly Limit Pricing," Discussion Papers 829, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 179-221, May.
  6. Paul R. Milgrom & John Roberts, 1984. "Price and Advertising Signals of Product Quality," Cowles Foundation Discussion Papers 709, Cowles Foundation for Research in Economics, Yale University.
  7. Xepapadeas, A. P., 1991. "Environmental policy under imperfect information: Incentives and moral hazard," Journal of Environmental Economics and Management, Elsevier, vol. 20(2), pages 113-126, March.
  8. Joseph E. Harrington Jr., 1987. "Oligopolistic Entry Deterrence under Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 211-231, Summer.
  9. Segerson, Kathleen, 1988. "Uncertainty and incentives for nonpoint pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 15(1), pages 87-98, March.
  10. Stavins, Robert N., 1996. "Correlated Uncertainty and Policy Instrument Choice," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 218-232, March.
  11. Espínola-Arredondo, Ana & Muñoz-García, Félix, 2013. "When does environmental regulation facilitate entry-deterring practices," Journal of Environmental Economics and Management, Elsevier, vol. 65(1), pages 133-152.
  12. Thomas Alban, 1995. "Regulating Pollution under Asymmetric Information: The Case of Industrial Wastewater Treatment," Journal of Environmental Economics and Management, Elsevier, vol. 28(3), pages 357-373, May.
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