The Comparative Statics Properties of the Theory of the Regulated Firm

David L. McNicol

Bell Journal of Economics, 1973, vol. 4, issue 2, 428-453

Abstract: This paper presents an analysis of the comparative statics properties of the theory of the regulated firm. It is assumed that the firm either maximizes profit, subject to regulatory constraint, or maximizes revenue, subject to regulatory constraint and a profit constraint. The question asked in each case is whether there are comparative statics properties which distinguish effective from ineffective regulation. Several properties which do so are identified. In particular, the firm's derived demands are found to have some very striking properties. It is shown that if the regulatory constraint is effective, then at given output the firm's demand for capital decreases while its demand for labor increases with increases in the wage rate. These peculiar properties also occur in some cases when the regulatory constraint is not binding if revenue is maximized. However, there prove to be properties which conclusively distinguish revenue maximization from profit maximization.

Date: 1973
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