Regulating national firms in a common market under asymmetric information

In a supranational common market, national regulation can produce inefficiencies. National regulators typically care only for domestic welfare and they tend to push national firms in the common market. When information about production costs is held privately by firms and is unknown to the regulator, competition between national and foreign firms can help to reduce the information rents captured by national producers and thus increase efficiency. This is more likely when the production costs of national and foreign firms are highly correlated, for instance because firms use similar technologies. In other cases, market share rivalry pushes national regulators to inefficiently expand the production of national firms, also increasing the information rents. When the ex-ante uncertainty of the production costs is high, the creation of a common market is more likely to increase expected welfare, as compared to separated national markets.