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Why the Entry Regulation of Mobile Phone Manufacturing in China Collapsed: The Impact of Technological Innovation

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  • Zhimin Liao
  • Xiaofang Chen

Abstract

This paper analyzes why an entry regulation that generated large rents was abruptly abolished. We argue that the rents supporting the regulation dissipated because a new technology encouraged illegal entry by raising the cost of enforcement. In 1998, China introduced a licensing system for the manufacturing of mobile phones. This system created large monopoly rents for those who received the licenses. Later, in 2003, an integrated chip was invented that significantly lowered the costs of manufacturing mobile phones. Immediately thereafter, thousands of unlicensed manufacturers started producing mobile phones. The manufacturers who had been licensed previously suffered large losses from this competition, and many went bankrupt. The new chip technology raised the cost of enforcement by making entry extremely cheap. The regulators turned to local governments and telephone network operators for assistance in suppressing the illegal phones, but both groups did not cooperate because they benefited from the flourishing illegal phone industry.

Suggested Citation

  • Zhimin Liao & Xiaofang Chen, 2011. "Why the Entry Regulation of Mobile Phone Manufacturing in China Collapsed: The Impact of Technological Innovation," Journal of Law and Economics, University of Chicago Press, vol. 54(S4), pages 207-228.
  • Handle: RePEc:ucp:jlawec:doi:10.1086/662991
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    References listed on IDEAS

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    1. Richard A. Posner, 1971. "Taxation by Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 22-50, Spring.
    2. Jarrell, Gregg A, 1984. "Change at the Exchange: The Causes and Effects of Deregulation," Journal of Law and Economics, University of Chicago Press, vol. 27(2), pages 273-312, October.
    3. Gary S. Becker, 1983. "A Theory of Competition Among Pressure Groups for Political Influence," The Quarterly Journal of Economics, Oxford University Press, vol. 98(3), pages 371-400.
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    Cited by:

    1. Liao Zhimin, 2015. "No Proper Name, No Proper Conduct: Company Affiliation and Product Quality in Wenzhou," Man and the Economy, De Gruyter, vol. 2(1), pages 45-67, June.

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