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Entry, Prices, and Investment in Regulated Industries

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  • De Fraja, Gianni

Abstract

The paper studies how the optimal regulatory policy is affected by the possibility of unregulated firms entering the market. In such cases, the regulator may prefer to limit price and cost reductions in the regulated incumbent. The extent to which this happens is shown to depend on the extent of the regulator's commitment: if it commits to a chosen policy, then the market outcome following entry is less competitive than it would be without commitment: price and production costs are both higher. We also show that, unlike the natural monopoly case, incentives for cost reducing investment are stronger when the regulatory policy has a short regulatory interval. Copyright 1997 by Kluwer Academic Publishers

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  • De Fraja, Gianni, 1997. "Entry, Prices, and Investment in Regulated Industries," Journal of Regulatory Economics, Springer, vol. 11(3), pages 257-270, May.
    • Handle: RePEc:kap:regeco:v:11:y:1997:i:3:p:257-70
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    Cited by:

    1. Alberto Iozzi & Marco Fioramanti, 2004. "Strategic Choice of the Price Structure and Entry Deterrence Under Price Cap Regulation," Bulletin of Economic Research, Wiley Blackwell, vol. 56(4), pages 333-352, October.

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