12 - Regulating Multi-Product Oligopolies

Summary

Regulated industries increasingly look like multi-product monopolies or oligopolies, which necessitates adaptations in the design of regulation. An oligopolistic market structure will be preferred if it allows information rents to be cut and shared and if these gains offset lost scale economies. Rent cuts come from sampling effects, yardstick competition and complementarity effects. In mixed oligopolies, differences in the objectives and constraints of public and private competitors make the regulation tasks more complex and limit the possibility of implementing yardstick competition. If the costs are relatively well known (standardized technologies), a monopoly may be a better choice as there is no variance in production costs and so dual sourcing is inefficient. Otherwise, when the firms’ costs are correlated, a duopoly leads to lower marginal costs despite the need to duplicate the R&D costs. In mixed oligopolies, regulation must be adapted to the differences in the objectives and institutional constraints of private and public operators. In oligopolistic industries, self-regulation and regulation by contract offer alternatives to regulation by a specialized regulatory agency. For a multi-product monopolist, the regulatory challenge is to decide whether to set a rate of return for each product sold by the regulated firm or for its overall business.