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Threat-based regulation and endogenously determined punishments

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  • C F Elliott
  • M Z Acutt

Abstract

We present a theoretical model to show that through the adoption of simple regulatory rules, the threat of regulation as well as regulation itself impacts upon a firm s pricing strategy. The model is relevant to general antitrust policy, as well as the regulation of individual utility industries. While the paper focuses on the threat of revenue regulation, the principal results may also hold when regulation takes the form of penalties on prices charged. In the model the probability of regulatory intervention increases with the level of price charged, as does the toughness of any regulation imposed. This form of regulation, although not optimal, has the advantage of being relatively simple to apply. The proposed regulatory rules offer a form of transparent regulation that could circumvent fears of regulatory capture.

Suggested Citation

  • C F Elliott & M Z Acutt, 2001. "Threat-based regulation and endogenously determined punishments," Working Papers 539877, Lancaster University Management School, Economics Department.
    • Handle: RePEc:lan:wpaper:539877
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    References listed on IDEAS

    as
    1. Logan, John W & Masson, Robert T & Reynolds, Robert J, 1989. "Efficient Regulation with Little Information: Reality in the Limit?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 851-861, November.
    2. Helm, Dieter & Jenkinson, Tim, 1997. "The Assessment: Introducing Competition into Regulated Industries," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 13(1), pages 1-14, Spring.
    3. Acutt, Melinda & Elliott, Caroline & Robinson, Terry, 2001. "Credible regulatory threats," Energy Policy, Elsevier, vol. 29(11), pages 911-916, September.
    4. Souam, Said, 2001. "Optimal antitrust policy under different regimes of fines," International Journal of Industrial Organization, Elsevier, vol. 19(1-2), pages 1-26, January.
    5. Alvin K. Klevorick, 1973. "The Behavior of a Firm Subject to Stochastic Regulatory Review," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 57-88, Spring.
    6. Melinda Acutt & Caroline Elliott, 2001. "Threat-Based Competition Policy," European Journal of Law and Economics, Springer, vol. 11(3), pages 309-317, May.
    7. Bawa, Vijay S & Sibley, David S, 1980. "Dynamic Behavior of a Firm Subject to Stochastic Regulatory Review," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(3), pages 627-642, October.
    8. Jack High (ed.), 2001. "Competition," Books, Edward Elgar Publishing, number 1751.
    9. Amihai Glazer & Henry McMillan, 1992. "Pricing by the Firm Under Regulatory Threat," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(3), pages 1089-1099.
    10. Taylor, William E & Zona, J Douglas, 1997. "An Analysis of the State of Competition in Long-Distance Telephone Markets," Journal of Regulatory Economics, Springer, vol. 11(3), pages 227-255, May.
    11. Zweifel, Peter & Crivelli, Luca, 1996. "Price Regulation of Drugs: Lessons from Germany," Journal of Regulatory Economics, Springer, vol. 10(3), pages 257-273, November.
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    Citations

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    Cited by:

    1. Blum, Ulrich & Growitsch, Christian & Krap, Niels, 2006. "Network Investment and the Threat of Regulation – Preventing Monopoly Exploitation or Infrastructure Construction?," IWH Discussion Papers 7/2006, Halle Institute for Economic Research (IWH).
    2. Oelmann, Mark & Schölermann, Sonja, 2006. "Die Anwendbarkeit von Vergleichsmarktanalysen bei Regulierungsentscheidungen im Postsektor," WIK Discussion Papers 284, WIK Wissenschaftliches Institut für Infrastruktur und Kommunikationsdienste GmbH.

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