Voting on Prices: The Political Economy of Regulation
نویسنده
چکیده
Economists have long recognized that regulation is an imperfect solution to market failure. Do the inefficiencies of regulation outweigh the inefficiencies of market failure? In this paper, we develop a stylized model of a monopolist offering two services, one more widely demanded than the other. We compare aggregate surplus from unregulated monopoly with aggregate surplus from a median voter model of price setting in a (perfectly) regulated monopoly. We find that (i) median voter pricing can yield substantially lower aggregate surplus than monopoly pricing; and (ii) empirical evidence of the recent evolution of US telecommunications prices confirms the model. JEL Classification Codes: D72, L51
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