Producer Protection, Prior Market Structure and the Effects of Government Regulation

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Producer Protection, Prior Market Structure and the Effects of Government Regulation

Assignment on Regulatory Economics

1/5/2012

INTRODUCTION
The direct economic regulation of business by independent government commissions has a one-hundred year history on the North American continent. It is generally asserted that the purpose of such commissions is to protect consumers from exploitation by limiting the economic powers of certain firms having pervasive effects on the public interest (for example, transportation companies and public utilities). . However, the findings of the relatively few em-pirical studies of the economic effects of regulation indicate that important differences actually do exist in these effects. The disparities in these findings raise the question of why the actual economic effects of regulation differ among industries despite the supposedly common, avowed purpose of regulation. They also question whether a single hypothesis is adequate to explain the diverse effects of regulation. THREE HYPOTHESES REGARDING REGULATION

1.Consumer-Protection Hypothesis:
This is the most popular of existing hypotheses. It implies that regulation will protect consumer interests by reducing prices until they equal marginal costs, by preventing discriminatory pricing, by improving service quality (at existing prices), by encouraging the entry of firms that are more efficient or that offer more preferred price/product combinations, and by reducing industry profits to the market rate of return. , they often appear to promote the interests of regulated firms to the disadvantage of consumers. Despite the real purpose of regulation, the regulated industries have managed to pervert their regulators until the commissions become the protectors of the "regulated" rather than of consumers. 2.No-effect Hypothesis:

This hypothesis implies that regulation has no effect on regulated industries (other than to impose certain costs in the performance of regulatory procedures). This situation could result if •an already powerful industry is able to control its regulators (the supplementary perversion hypothesis). •if the market structure prior to regulation were competitive and the actual effect of regulation is to obtain competitive performance •the prior market structure were monopolistic and the actual effect of regulation is to yield monopoly performance 3.Producer-Protection Hypothesis:

It says that the actual effect of regulation is to increase or sustain the economic power of an industry. Such a situation could result if regulation converted a formerly competitive or oligopolistic industry into a cartel (that is, if regulation helped previously independent producers form an agreement to act together9), if it increased the effectiveness of an existing cartel, or if it maintained an existing monopoly (or cartel) where rival firms would otherwise enter to provide competition in response to the growth of markets or the development of new technology. Under this situation, one would expect to find regulation doing such things as increasing prices, promoting price discrimination, reducing or preventing the entry of rival firms, and increasing industry profits.

The no-effect hypothesis does not appear to be generally descriptive of the effects of government regulation. The implications of the consumer-protection hypothesis also have a problem of reconciliation with available evidence and are quite inconsistent. The implications of the producer-protection hypothesis do turn out to be consistent with much of the available evidence regarding the effects of government regulation, once recognition is given to the effects of the prior (non-regulated) market structures of various industries. The obvious way to test the ability of the producer-protection hypothesis to explain the apparently diverse effects of regulation within the context of prior market structure is to classify regulated industries into two groups on the...
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