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Price-Capping Regulation as a Protectionist Strategy in Developing Countries

Author

Listed:
  • Peter Lawrence

    (Keele University)

  • Arijit Mukherjee

    (Keele University)

Abstract

In developing countries undergoing liberalising economic reforms, there are typically local incumbents facing the loss of protection. Strategic lobbying by such firms for a price-capping regulatory regime is, under certain conditions, one way in which they can deter entry by competitors who are likely to be foreign firms. 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. We then show that it is possible for the profit of the incumbent to be greater under regulation which deters entry than under unregulated duopoly. Counter-intuitively, we further discover that lobbying for regulation is to be expected where the incumbent firm is relatively cost-efficient. Finally, we consider the case of multiple incumbents threatened by entry. We observe a co- ordination problem and consider the possibility of co-operation in lobbying. We then show that such co-operation, if possible, is always preferable to non-co-operation.

Suggested Citation

  • Peter Lawrence & Arijit Mukherjee, 2002. "Price-Capping Regulation as a Protectionist Strategy in Developing Countries," Industrial Organization 0211009, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpio:0211009
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    References listed on IDEAS

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    More about this item

    Keywords

    Price-capping; regulation; lobbying; incumbents; entrants; free-riding; co-operation;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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