Consistent Regulation of Infrastructure Businesses: Some Economic Issues

This paper examines some important economic aspects associated with the notion that consistency in the regulation of infrastructure businesses is a desirable feature. It makes two important points. First, it is not easy to measure consistency. In particular, one cannot simply point to different regulatory parameters as evidence of inconsistent regulatory policy. Second, even if one does observe consistency emerging from decisions made by different regulators, it does not necessarily mean that this consistency is desirable. It might be the result, at least partially, of career concerns of regulators.

Outcomes and Strategy Choices in Tullock Contests

We explore the relationship between the choice of the strategy space and outcomes in Tullock contests. In particular, in a framework where one of the contest's participants moves first, we show that there is an equilibrium where this individual wins the contest with probability one. We also show that not only the nature of the outcome changes (e.g., who wins the contest) with the choice of the strategy space but also that a contest organiser might have preferences over this space. We argue that ultimately the analyst does not have complete freedom to choose the strategy space. Instead, he or she should consider the strategies that are permitted by the organisers of a formal contest, whose interests might lie in maximising returns. That is, the analyst's choice of the strategy space is not neutral.Strategy space, Tullock contests

Bundling and Foreclosure

We examine a two-sector model characterized by monopoly provision in market 1 and perfect competition in market 2. We follow the set up in Martin (1999), but we consider the case where goods 1 and 2 can be either substitutes or complements. With this framework, we analyse the profit sacrifice required if the monopolist offers a bundle consisting of one unit of good 1 and k units of good 2 to foreclose the competitive sector. Our results show that foreclosing rivals via bundling is less costly when products are complements rather than substitutes.

Welfare Enhancing Mergers under Product Differentiation

We follow the duopoly framework with differentiated products as in Singh and Vives (1984) and Zanchettin (2006) and examine the welfare effects of a merger between two asymmetric firms. We find that for quantity competition, the merger increases total welfare if the cost asymmetry falls into a specific range. Furthermore, this parameter range widens if the products are closer substitutes. On the other hand, mergers are never welfare enhancing in this setting when firms compete in prices.

Good and Bad Consistency in Regulatory Decisions

We examine sources of consistent regulatory decisions in a model where regulators respond to mixed incentives, including career concerns. In the reference case, regulators act as "public servants" who strive to make the socially optimal decision, given limited information and the opportunity to observe the prior decision of another regulator. Adding career concerns, such as a desire to avoid controversy or to implement a future employer’s preferred policy, tends to reduce the degree of differentiation in sequentially taken decisions, hence increasing consistency. Thus, it is possible to observe that the self-interested career concerns of regulators give rise to consistency in regulatory decision-making. This type of consistency might lead to substantial deviations from optimal regulatory policies.

Can game theory be saved?

Game-theoretic analysis is a well-established part of the toolkit of economic analysis. In crucial respects, however, game theory has failed to deliver on its original promise of generating sharp predictions of behavior in situations where neoclassical microeconomics has little to say. Experience has shown that in most situations, it is possible to tell a game-theoretic story to fit almost any possible outcome. We argue that, in general, any individually rational outcome of an economic interaction may be supported as the Nash equilibrium of an appropriately chosen game, and that a wide range of these outcomes will have an economically reasonable interpretation. We consider possible attempts to salvage the original objectives of the game-theoretic research program. In at least some cases, information on institutional structures and observations of interactions between agents can be used to limit the set of strategies that may be considered reasonable.game theory, equilibrium

Endogenous Mergers under Multi-Market Competition

This paper examines a simple model of strategic interactions among firms that face at least some of the same rivals in two related markets (for goods 1 and 2). It shows that when firms compete in quantity, market prices increase as the degree of multi-market contact increases. However, the welfare consequences of multi-market contact are more complex and depend on how two fundamental forces play themselves out. The first is the selection effect, which works towards increasing welfare as shutting down the more inefficient firm is beneficial. The second opposing effect is the internalisation of the Cournot externality effect; reducing the production of good 2 allows firms to sustain a higher price for good 1. This works towards increasing prices and, therefore, decreasing consumer surplus (but increasing producer surplus). These two effects are influenced by the degree of asymmetry between markets 1 and 2 and the degree of substitutability between goods 1 and 2.

Markets for Influence

We specify an oligopoly game, where firms choose quantity in order to maximise profits, that is strategically equivalent to a standard Tullock rent-seeking game. We then show that the Tullock game may be interpreted as an oligopsonistic market for influence.Alternative specifications of the strategic variable give rise to a range of Nash equilibria with varying levels of rent dissipation.Tullock contests, oligopoly

Markets for Influence

We specify an oligopoly game, where firms choose quantity in order to maximise profits, that is strategically equivalent to a standard Tullock rent- seeking game. We then show that the Tullock game may be interpreted as an oligopsonistic market for in?uence. Alternative specifications of the strategic variable give rise to a range of Nash equilibria with varying levels of rent dissipation