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Investment Incentives of a Regulated Dominant Firm


  • Biglaiser, Gary
  • Ma, Ching-To Albert


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

Suggested Citation

  • Biglaiser, Gary & Ma, Ching-To Albert, 1999. "Investment Incentives of a Regulated Dominant Firm," Journal of Regulatory Economics, Springer, vol. 16(3), pages 215-235, November.
  • Handle: RePEc:kap:regeco:v:16:y:1999:i:3:p:215-35

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    References listed on IDEAS

    1. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-242, September.
    2. Hsu, Michael, 1997. "An introduction to the pricing of electric power transmission," Utilities Policy, Elsevier, vol. 6(3), pages 257-270, September.
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    8. Cardell, Judith B. & Hitt, Carrie Cullen & Hogan, William W., 1997. "Market power and strategic interaction in electricity networks," Resource and Energy Economics, Elsevier, vol. 19(1-2), pages 109-137, March.
    9. Andreas Ehrenmann & Karsten Neuhoff, 2009. "A Comparison of Electricity Market Designs in Networks," Operations Research, INFORMS, vol. 57(2), pages 274-286, April.
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    Cited by:

    1. Nitsche, Rainer & Wiethaus, Lars, 2011. "Access regulation and investment in next generation networks -- A ranking of regulatory regimes," International Journal of Industrial Organization, Elsevier, vol. 29(2), pages 263-272, March.
    2. Anastassios Gentzoglanis, 2002. "Privatization, Investment and Efficiency in the Telecommunications Industry: Theory and Empirical Evidence from MENA Countries," Working Papers 0230, Economic Research Forum, revised 10 Oct 2002.
    3. Ma, Ching-to Albert, 2004. "Public rationing and private cost incentives," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 333-352, January.
    4. Fernando Rubio, 2005. "Eficiencia De Mercado, Administracion De Carteras De Fondos Y Behavioural Finance," Finance 0503028, EconWPA, revised 23 Jul 2005.
    5. Weber, Thomas A., 2014. "On the (non-)equivalence of IRR and NPV," Journal of Mathematical Economics, Elsevier, vol. 52(C), pages 25-39.
    6. GROSSE Olivier & SEVI Benoît, 2005. "Dérégulation et R&D dans le secteur énergétique européen," Cahiers du CREDEN (CREDEN Working Papers) 05.07.59, CREDEN (Centre de Recherche en Economie et Droit de l'Energie), Faculty of Economics, University of Montpellier 1.
    7. João Vareda, 2007. "Unbundling and Incumbent Investment in Quality Upgrades and Cost Reduction," Working Papers 31, Portuguese Competition Authority.
    8. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
    9. Debande, Olivier, 2001. "Deregulating and privatizing statutory monopolies," Journal of Economics and Business, Elsevier, vol. 53(2-3), pages 111-137.

    More about this item

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • K20 - Law and Economics - - Regulation and Business Law - - - General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity


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