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ECON306: Industrial Organization

Unit 8: The Role of Government   Regulation is required in situations where a firm has excessive market power.   From a firm’s point of view, market power translates as greater profits and greater firm value.   However, from the perspective of consumers and policymakers, market power implies reduced social welfare, as firms make consumers pay higher prices for their products and services.  A high price can also lead to allocative inefficiency and even productive inefficiency (i.e. when a firm with market power tries to limit the supply of its good in order to keep its price high).  While policymakers work to reduce these inefficiencies through regulation, there are situations where imperfect markets may be preferable to regulated outcomesConsider, for example, instances where the government itself can be a cause of market power.  A firm interested in establishing a monopolist situation might work to influence policymakers by "rent seeking," resulting in wasteful side effects.

This section studies the regulation of large business firms and corporations through antitrust laws.  It also discusses the regulation of industries in which services are provided exclusively by privately owned firms, but regulated by public agencies.  These firms are often called "public utilities."   Lastly, this unit addresses the role that the government plays in pointing out the potential problems that arise due to regulation.

Unit 8 Time Advisory
Time Advisory: This unit will take you 4 hours to complete.
·        Subunit 8.1: 3 hours
·        Subunits 8.2-8.3: 1 hour

Unit8 Learning Outcomes
Upon successful completion of this unit, students will be able to:
·       Analyze why regulation can be important.
·       Explain the role of government in the regulation of competition, regulation of industries, and in social regulation.
·       Analyze how governmentintervention can directlyaffect market outcomes, such as prices, quality, product variety, or the number of service providers,by changing market institutions.
·       Analyze how government regulation can indirectly affect market outcomes by changing or imposing constraintson market participants.
·       Explain rationales for the existence of price and entryregulation.
·       Compare the public interest explanation for regulation vis-à-vis the economic explanation of regulation.
·       Explain the market failure test for regulation.
·       Define a natural monopoly, derive pricing strategies for a natural monopoly, and describe regulation of a natural monopoly.
·       Explain what is regulatory risk.
·       Explain the different economic theories of regulation.
·       Analyze the problems associated with regulation.

  • Reading: Kevin Hinde's The Economics of Competition: A Global Perspective Link: Kevin Hinde's[The Economics of Competition: A Global Perspective](http://www.kevinhinde.com/competition/) (PDF)

    Instructions: Please follow the link to reach the home page of Professor Kevin Hinde's The Economics of Competition: A Global Perspective course.  Under lecture 1, click on "Cusack JL and Hahn R W (2003) The costs and benefits of regulation. Implications for developing nations, OECD, Paris," and read this essay on regulation.  Please note that this reading covers subunits 8.1-8.3.

    Note on the Text: Please note this reading is hosted by Kevin Hinde, who is a Senior Teaching Fellow in Strategy and Economics at Durham University.

    Terms of Use: Please respect the copyright and terms of use displayed on the web pages above.

8.1 The Rationale for Regulation   - Reading: Berkeley Electronic Press: Jeffrey R. Church and Roger Ware's Industrial Organization: A Strategic Approach:"Chapter 24: Rationale for Regulation" Link: Berkeley Electronic Press: Jeffrey R. Church and Roger Ware's Industrial Organization: A Strategic Approach: "Chapter 24: Rationale for Regulation" (PDF)
 
Instructions: If you have not saved this PDF file, you will need to download the PDF file of the book by clicking on the "Download" tab on the right hand side of the webpage.  Please read the introduction before reading sections marked. 
 
Terms of Use: Please respect the copyright and terms of use displayed on the web pages above.

8.2 Governmental Regulation   - Reading: KevinHinde.com: Kevin Hinde's The Economics of Competition: A Global Perspective Link: KevinHinde.com: Kevin Hinde'sThe Economics of Competition: A Global Perspective (PDF)

 Instructions: Please follow the link to reach the home page of
Professor Kevin Hinde's The Economics of Competition: A Global
Perspective course.  Under lecture 1, click on "Cusack JL and Hahn R
W (2003) The costs and benefits of regulation. Implications for
developing nations, OECD, Paris," and read this essay on
regulation.  Please note that this reading covers subunits
8.1-8.3.  

 Note on the Text: Please note this reading is hosted by Kevin
Hinde, who is a Senior Teaching Fellow in Strategy and Economics at
Durham University.  
 Terms of Use: Please respect the copyright and terms of use
displayed on the web pages above.

8.2.1 Regulation of Competition   Note: This subunit is covered by the reading assigned under Unit 8.2. 

8.2.2 Regulation of Industries   Note: This subunit is covered by the reading assigned under Unit 8.2. 

8.2.3 Social Regulation               Note: This subunit is covered by the reading assigned under Unit 8.2. 

8.3 Problems with Regulation   *Note: This subunit is covered by the reading assigned under Unit 8.2. 

Note: Designing institutions for the purpose of regulation is not a simple matter.  Traditional regulatory arrangements have by and large proved to be unsatisfactory, often creating a great deal of economic inefficiency and weakening firm incentives to innovate or control costs.  As technologies and institutions change with time, so too does the degree of regulation.  The current trend is to deregulate or rely less on the regulation of entire industries wherever possible.  New arrangements allow for partial regulation of industries, providing competitive forces with more room to operate.*