Does Regulation Drive Competition? Evidence from the Spanish Local TV Industry

Although we have many tools to understand the effect of regulation on competition, we know little about the importance of enforcement in explaining the impact of regulation. For this purpose, this paper uses data from Spanish local television industry in Spain from 1995 through 2001, which provide an unique opportunity for examining how competition changes with the introduction of regulation and a posterior liberalization. During this period, the television industry transitioned from a state of alegality (no regulation in place) to being highly regulated and finally to being deregulated. Using a firm entry model from Bresnahan and Reiss (1990, 1991), we estimate local TV station entry thresholds by number of entrants across years. We decompose the ratio into the fixed costs and variable profits, and find both an increase in the fixed-costs ratios and decrease in the variable-profit ratios drive the departure in the entry threshold from the one in other years. We find the model parameters are informative about the nature of the regulation and how strongly the government enforces the regulation.