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Partial Regulation in Vertically Differentiated Industries
Author(s) -
BERGANTINO ANGELA S.,
DE VILLEMEUR ETIENNE BILLETTE,
VINELLA ANNALISA
Publication year - 2011
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/j.1467-9779.2010.01488.x
Subject(s) - point (geometry) , quality (philosophy) , industrial organization , economics , product differentiation , microeconomics , environmental regulation , vertical integration , business , natural resource economics , mathematics , philosophy , geometry , epistemology , cournot competition
We provide theoretical foundations for quality‐adjusted price‐cap regulation in industries where a regulated incumbent and an unregulated entrant offer vertically differentiated products competing in price and quality. We show that, whether or not the incumbent anticipates the reaction of the entrant, the optimal weights in the cap depend upon the market served by the entrant, despite the latter not being directly concerned by regulation. We further show that the cap is robust to small errors in the weights. Our findings point to the conclusion that, in partially regulated industries, regulators should use information about the whole sectors rather than on the sole regulated incumbents.