Regulation and Industrial Organization

Abstract

This paper examines the effects on firm behavior and industry structure of industry-wide price regulation by the state. Such regulation, wherein regulators set prices with regard to an industry-wide aggregate performance measure, has been (and still is) widely used and is shown to induce inefficiencies in firm operation. In general such regulation can result in setting prices high enough to maintain inefficient firms, and it encourages to inefficient firm operation due to incentives to inflate costs and Averch-Johnson effects.