How Much Competition is Enough Competition for Regulatory Forbearance?

Dennis L. Weisman

doi:10.1515/bejeap-2024-0143

Article

How Much Competition is Enough Competition for Regulatory Forbearance?

Dennis L. Weisman

Published/Copyright: August 13, 2024

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From the journal The B.E. Journal of Economic Analysis & Policy Volume 24 Issue 4

Abstract

Critical loss analysis is used to define product markets for merger analysis and determine if market forces are sufficient to discipline prices in transitionally competitive regulated markets. Unlike the approval of a merger, however, regulatory forbearance is a reversible act. The threat of future (re)-regulation, or regulatory contestability, in combination with high price-cost margins and complementary demands can lower the critical loss (elasticity) necessary to justify the competitive classification of regulated services. This suggests that the intensity of competition sufficient to forbear from regulation can be considerably less than what regulators may believe is required a priori.

Keywords: critical elasticities; competition; economic regulation; regulatory forbearance; contestability; telecommunications

JEL Classification: L51; L96; L98

Corresponding author: Dennis L. Weisman, Department of Economics, Kansas State University, Manhattan, KS, 66506-4001, USA, E-mail: weisman@ksu.edu

Acknowledgments

I am grateful to the editor, Till Requate, an anonymous referee and a co-editor for thoughtful suggestions for revision that improved the original submission. I also wish to thank Alan Hamilton, Adam Sherr and Paul Vasington for illuminating discussions about the state of regulatory forbearance in the North-American telecommunications industry.

Appendix

Proof of Proposition 1.

A small price increase in market i yields non-increasing profits when

(A1) ∂ Π p 0 ∂ p i = q i + p i − c i i − ∑ j ≠ i n c i j ∂ q i ∂ p i + ∑ j ≠ i n p j − c j j − ∑ i ≠ j n c j i ∂ q j ∂ p i − μ p i M ≤ 0 .

Dividing through by q _i, rearranging terms and appealing to the expressions for c i i , N , c j j , N , ɛ _ii and ɛ _ji yields

(A2) 1 − p i − c i i , N p i ε i i + ∑ j ≠ i n p j − c j j , N p j ε j i R j R i − μ p i M q i ≤ 0 .

Simplifying (A2), rearranging terms and appealing to the expressions for γ _i and γ _j yields

(A3) ε i i ≥ γ i γ i − 1 1 + ∑ j ≠ i n γ j − 1 γ j R j R i ε j i − μ p i M q i .

Appealing to Definition 1 and solving (A3) as an equality yields ε i i * in (7). ■

Proof of Proposition 2.

The proofs are immediate upon differentiating (7) with respect to γ _i, γ _j, ɛ _ij and n, respectively. ■

Proof of Proposition 3.

Differentiating (7) with respect to M yields the result ■

Proof of Proposition 4.

For part (i),

(A4) μ p i = ∫ r ̲ p i r ̄ r p i r ̲ − r ̄ d r = p i r ̄ 2 − r ̲ 2 2 p i r ̄ − r ̲ .

For part (ii), differentiating (A4) with respect to p _i and simplifying yields the result. To demonstrate that μ p i > 0 , we can rewrite the expression in 4(ii) as follows μ p i = p i − 1 / 2 r ̄ p i ( r ̄ ) 2 + r ̲ r ̲ − 2 p i 1 / 2 r ̄ 4 p i 1 / 2 r ̄ − r ̲ 2 = p i − 1 / 2 r ̄ p i 1 / 2 r ̄ − r ̲ 2 4 p i 1 / 2 r ̄ − r ̲ 2 = 1 4 p i − 1 / 2 r ̄ > 0 . It follows from the expression for μ p i that μ p i p i = − 1 8 p i − 3 / 2 r ̄ < 0 . ■

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Received: 2024-04-23

Accepted: 2024-08-01

Published Online: 2024-08-13

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Articles in the same Issue

https://doi.org/10.1515/bejeap-2024-0143

Keywords for this article

critical elasticities; competition; economic regulation; regulatory forbearance; contestability; telecommunications