Price-Capping regulation as a protectionist strategy in developing countries
In developing countries undergoing liberalising reforms, there are typically local incumbents facing the loss of protection. Strategic lobbying by such firms for a price-capping regulatory regime can deter entry. 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 and that it is possible for the profit of the incumbent to be greater under regulation than under unregulated duopoly. We consider the case of multiple incumbents threatened by entry and also extend our analysis to incorporate lobbying by the entrant.
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