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The Regulation of Interdependent Markets

  • Raffaele Fiocco
  • Carlo Scarpa

We examine the issue of whether two monopolists which produce substitutable goods should be regulated by one (centralization) or two (decentralization) regulatory authorities, when the regulator(s) can be partially captured by industry. Under full information, two decentral- ized agencies - each regulating a single market - charge lower prices than a unique regulator, making consumers better off. However, this leads to excessive costs for the taxpayers who subsidize the Â…rms, so that centralized regulation is preferable. Under asymmetric informa- tion about the firms' costs, lobbying induces a unique regulator to be more concerned with the industry's interests, and this decreases social welfare. When the substitutability between the goods is high enough, the firms'lobbying activity may be so strong that decentralizing the regulatory structure may be social welfare enhancing.

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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2011-046.

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Length: 36 pages
Date of creation: Jul 2011
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Handle: RePEc:hum:wpaper:sfb649dp2011-046
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