Efficient indirect regulation under Protection for Sale

Doron Nisani ()
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Doron Nisani: Hebrew University of Jerusalem

Journal of Regulatory Economics, 2018, vol. 54, issue 1, No 3, 52 pages

Abstract: Abstract Regulatory intervention is necessary to overcome market failures. However, this kind of intervention may also create Protection for Sale conditions in the market—which might, in turn, lead to an inefficient resource allocation. This paper examines the effect of an indirect intervention on regulated market welfare under Optimal Regulation and Protection for Sale conditions. Although under Optimal Regulation conditions there is zero welfare-loss as it derives from Differential Price Policy (DPP), it seems that under substantial Protection for Sale conditions this price policy increases the welfare-loss, and therefore a Uniform Price Policy (UPP) might achieve a smaller welfare-loss—due to the “free-riding” effect. Furthermore, this paper suggests that in between these two price policies lays a third option, a Combined Price Policy, that can balance between the accurate resource allocation (DPP) and the political pressure reduction (UPP) in order to reduce the welfare-loss and to increase the market efficiency.

Keywords: Protection for Sale; Free-riding; Menu-auction; Regulatory policy (search for similar items in EconPapers)
JEL-codes: D61 D72 H42 L78 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/s11149-018-9360-3

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