TABLE OF CONTENTS
Learning from the Past - Nancy L. Rose
DOI: 10.7208/chicago/9780226138169.003.0001
[antitrust, competition, economic regulation, deregulation, risk regulation, market failure, financial regulation]
The legacy of regulatory reform and privatization has come under increasing attack since the recent financial crisis. This volume analyzes the history of regulation and its reform across various industries to extract important lessons for the design and execution of government policy. There are several broad themes. First, even modest differences in market and regulatory institutions can yield substantial differences in outcomes; a “one size fits all” regulatory prescription is unlikely. Second, incentives embedded in regulatory structures drive firm behavior and, if misunderstood, may yield unintended consequences. Third, innovations can change not only market opportunities, but also the regulatory game. Static regulation that does not keep pace with a dynamic industry may become increasingly irrelevant. Finally, while we have learned much about the design and execution of more effective and efficient regulation, regulatory instruments remain inherently imperfect, and policymakers confront a tradeoff between imperfect markets and imperfect regulation. Regulatory and policy responses subsequent to the 2008 financial crisis suggest that many of these insights have yet to be fully recognized. This may reflect the political economy of regulation, but if it arises from unfamiliarity with the lessons of past regulation, this work is intended to help fill the gap. (pages 1 - 24)
This chapter is available at:
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Antitrust and Regulation - Nancy L. Rose
DOI: 10.7208/chicago/9780226138169.003.0002
[antitrust, competition policy, regulation, deregulation, industrial organization, political economy, capture]
Since the passage of the Interstate Commerce Act (1897) and the Sherman Act (1890), regulation and antitrust (competition policy) have operated as competing mechanisms to control competition. Regulation produced cross-subsidies and favors to special interests, but specified prices and rules of mandatory dealing. Antitrust promoted competition without favoring special interests, but could not formulate rules for particular industries. Antitrust and regulation can be viewed as complements, where policymakers assign control of competition to courts or regulatory agencies based on their relative strengths. Antitrust may act as a constraint on what regulators can do. Controlling competition is a particular challenge in network industries, where mediating “vertical” interactions across firms, particularly for “bottleneck,” or essential facilities, is important. This chapter uses a game theoretic framework of political bargaining and the historical record of antitrust and regulation across several regulated industries to explore positive and normative rationales for choosing between these policy instruments. It highlights the conditions under which competition policy and regulation may be complements rather than substitutes in the policy arsenal. The chapter argues that the deregulation movement reflected the relative competencies of antitrust and regulation, and describes the emergence of antitrust as the primary policy tool to control competition. (pages 25 - 62)
This chapter is available at:
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How Airline Markets Work … or Do They? - Nancy L. Rose
DOI: 10.7208/chicago/9780226138169.003.0003
[airlines, deregulation, economic regulation, regulatory reform, public policy issues, competition, market power]
This chapter provides a detailed synthesis of the consequences of regulation and its reform for the passenger airline industry. It reviews commercial passenger aviation during its first five decades, when government policy rather than market forces shaped its development and operation in almost all markets. Next, it chronicles the movement toward US deregulation in the mid-1970s, the first salvo in what would become a broad worldwide deregulation movement. It assesses the evidence on the myriad changes in price structures, network and market structure, competition, and service quality since the Airline Deregulation Act of 1978. While deregulation has been associated with consumer benefits, the transition path to a market-based equilibrium has been difficult, and not all stakeholders have gained. Finally, the chapter analyzes a set of ongoing policy concerns, some of which have been highlighted by those calling for renewed government regulation. These include questions about the sustainability of competition and volatility of airline profits; concern about the market power of dominant airlines; and the implications of investment shortfalls in airport and air traffic infrastructure for congestion. While the transition from regulation to competition has been long and unpredictable, the chapter finds little reason to second-guess airline deregulation. (pages 63 - 136)
This chapter is available at:
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Cable Regulation In The Internet Era - Nancy L. Rose
DOI: 10.7208/chicago/9780226138169.003.0004
[cable television, cable television regulation, multi-channel video programming, economic regulation, deregulation, price regulation, bundling]
The multi-channel video programming (MVPD) market has changed considerably in recent years. Telephone operators (“telcos”) have entered in parts of the U.S. and online video distributors are a growing source of television viewing. Direct-Broadcast Satellite service, spurred by 1999 legislation that leveled the playing field with cable television systems, has grown substantially. This chapter considers cable television regulation in light of these developments. It surveys the empirical record on the effects of price regulation in U.S. cable markets across the four major periods of regulation and deregulation, focusing on potential price and quality tradeoffs. The evidence suggests that unregulated periods exhibit rapid increases in quality and penetration (and prices), while regulated periods exhibit slight decreases in prices and possibly lower quality. Consumer welfare estimates suggest consumers prefer unregulated cable services. Next, the incomplete evidence on competition between cable operators, and cable, satellite or telco providers, is reviewed. Four open issues in cable markets are considered: horizontal concentration and vertical integration in the programming market, bundling by cable systems and programmers, online video distribution, and temporary programming blackouts from failed carriage negotiations for broadcast and cable programming. While the distribution market is now more competitive, concerns in these areas remain. (pages 137 - 194)
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Regulating Competition in Wholesale Electricity Supply - Nancy L. Rose
DOI: 10.7208/chicago/9780226138169.003.0005
[electricity industry, economic regulation, regulatory restructuring, deregulation, competition, market design, wholesale electricity markets, vertically-integrated monopoly]
Experience of the past twenty years suggests that potential benefits from electricity industry restructuring are small relative to those from introducing competition into other network industries. Also, the probability of costly market failure in the electricity supply industry, often due to the exercise of unilateral market power, seems higher than in other network industries. This chapter shows that electricity industry restructuring is an evolving process that requires market designers to choose between an imperfectly competitive market and an imperfect regulatory process to provide incentives for least-cost supply at all stages of the production process. A goal of that process is to limit suppliers’ ability to exercise unilateral market power in wholesale generation markets, explicitly through market price-setting mechanisms, or implicitly through the regulatory price-setting process. Regulators can limit suppliers’ ability to exercise unilateral market power by altering the market structure, changing market rules, imposing penalties and sanctions on market participants, and explicitly setting the prices that market participants receive for their production. This chapter provides a theoretical framework for understanding how to make these choices in designing a wholesale electricity generation market that provides consumers with greater benefits relative to those under the former vertically-integrated regulated monopoly regime. (pages 195 - 290)
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Incentive Regulationin Theory and PracticeElectricity Distribution and Transmission Networks - Nancy L. Rose
DOI: 10.7208/chicago/9780226138169.003.0006
[network industries, incentive regulation, economic regulation, deregulation, restructuring, electric power, price cap regulation]
Public utility network industries historically evolved as either state-owned or private regulated vertically integrated monopolies. Many countries have privatized and restructured these sectors. Reforms typically involve the vertical separation of potentially competitive segments, which are gradually deregulated, from remaining network segments, which are assumed to have natural monopoly characteristics and remain subject to price, network access, service quality, and entry regulations. Reforms frequently include the introduction of “incentive regulation” mechanisms for the remaining regulated segments, as opposed to traditional “cost of service” or “rate of return” regulation. Although significant research has focused on the performance of potentially competitive segments that have been deregulated, the performance of new incentive regulation mechanisms in the segments subject to ongoing regulation is economically important. This chapter reviews the theoretical and conceptual foundations of incentive regulation theory, discusses practical implementation issues, and examines how incentive regulation mechanisms have been structured and applied. Its implementation in United Kingdom electric distribution and transmission networks, where the application of these mechanisms is most advanced, is examined. The implementation of incentive regulation concepts is more complex than it seems and has implications for regulatory resources devoted to information collection, monitoring, and dynamic regulatory adjustments. (pages 291 - 344)
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Telecommunications RegulationCurrent Approaches with the End in Sight - Nancy L. Rose
DOI: 10.7208/chicago/9780226138169.003.0007
[telecommunication regulation, mandatory unbundling, economic regulation, deregulation, access pricing, facilities based competition]
The regulatory restructuring of telecommunications markets, beginning with the breakup of AT&T in 1984 and extending to telecommunications markets worldwide, has transformed the telecommunications industry. The rise of cellular (“mobile”) telecommunications in recent years has achieved penetration rates over 80 percent in most industrialized countries, and for many consumers now replaces, rather than supplements, landline service. The spread of competing fiber networks operated by cable companies that offer voice service and broadband service in addition to pay TV has further transformed the competitive telecommunications environment in the US, and may do so in many other countries. This transition is greatly influenced by regulatory policy on mandatory unbundling of network elements, first adopted in the US in the mid-1990s and now used by regulators in most advanced economies. This chapter discusses central issues in deregulation of telephone service, including the prospect of competitive local markets. The chapter focuses on the role of facilities based competition in achieving that outcome. Regulatory impediments to facilities based competition are described, as are conditions under which a jurisdiction could end up with “regulation forever” by creating incentives for new entrants to choose a mandatory unbundling offer rather than investing in their own competing facilities. (pages 345 - 406)
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Regulation of the Pharmaceutical-Biotechnology Industry - Nancy L. Rose
DOI: 10.7208/chicago/9780226138169.003.0008
[pharmaceuticals, regulation, government-granted patents, market access, resource costs, regulatory structure]
Pharmaceuticals and human biologic products (“pharmaceuticals”) are regulated in virtually all aspects of the product life-cycle: safety, efficacy and manufacturing quality, promotion, and pricing. The rationale for heavy regulation of pharmaceuticals is not intrinsic natural monopoly, since any market power enjoyed by individual products derives ultimately from government-granted patents. Rather, regulation of market access, manufacturing and promotion arise because product efficacy and safety are critical to patient health but not immediately observable. In contrast, price regulation is best understood as a response by public insurers to the fact that insurance makes consumers price insensitive. Although this suggests that regulation of the pharmaceutical industry is potentially welfare enhancing, designing the optimal structure of such regulation is complicated. Market access regulation entails resource costs and foregone patient benefits in terms of fewer drugs and drug launch delays. On the pricing side, regulation should ideally constrain pricing moral hazard while preserving insurance coverage for patients and incentives for research and development (R&D). Designing regulatory structures that are theoretically sound and empirically practical is a theoretical and policy challenge. This chapter describes the pharmaceutical industry and its worldwide regulation. Empirical evidence on various kinds of regulation is described, along with welfare and innovation implications. (pages 407 - 484)
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Regulation and Deregulation of the US Banking IndustryCauses, Consequences, and Implications for the Future - Nancy L. Rose
DOI: 10.7208/chicago/9780226138169.003.0009
[banking industry, economic regulation, banking regulation, deregulation, public interest, regulatory constraints, banking efficiency, Glass-Steagall Act]
The banking industry has been subject to extensive government regulation covering what prices they can charge, what activities they can engage in, what risks they may take, what capital they must hold, and where they can operate. This chapter summarizes the evolution of these regulations, with a focus on those established in the 1930s and later removed in the late 20th century. The authors argue that regulatory change was driven by technological, legal, and economic shocks that affected competition among different groups. The role of both private and public interests play a key role in the analysis. The authors also describe the consequences of certain types of banking regulation and deregulation for both the financial services industry and the economy. The industry adapted to the regulatory constraints imposed in the 1930s, thus partially reducing the costs of regulatory distortions. On the one hand, banking efficiency increased following deregulation, and this generated some benefits for the economy as a whole. On the other hand, some aspects of market adaptations also led to the emergence of shadow banking and increasingly opaque interconnections within the financial system that contributed to the fragilities that resulted in the 2008 financial crisis. (pages 485 - 544)
This chapter is available at:
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Retail Securities Regulation in the Aftermath of the Bubble - Nancy L. Rose
DOI: 10.7208/chicago/9780226138169.003.0010
[Retail securities and investments, Market failure, Securities regulation, Sarbanes-Oxley, Economic regulation, Asymmetric information, Conflicts of interest, Antitrust policy, Deregulation]
This chapter discusses regulation of the retail securities and investments industry, written for and from the perspective of an industrial organization economist. It describes the economic size and scope of this industry, and reviews the sources of market failure that create an economic rationale for regulation, focusing on information imperfections that cause agency conflicts, and potential limits on investor processing, monitoring and oversight. After reviewing the laws and regulatory institutions that comprise the core of modern securities regulation, the chapter examines four regulatory issues with parallels in other industries. First is the question of price regulation versus disclosure of investment management fees, an ongoing debate particularly for the mutual fund sector. Next is the role of antitrust policy and agency regulation in disciplining firm behaviour, especially when regulatory capture may be a concern. Third is the interplay between firm boundaries and conflicts of interest, which were scrutinized in the creation and repeal of the Glass-Steagall Act. Fourth is the effects of competition when quality is not observed, and the potential role for minimum quality standards and regulatory oversight in this setting. The conclusion highlights the recurring role that the market and regulatory failures it describes play in financial market failures. (pages 545 - 588)
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