Firm-Regulator Interaction with Respect to Firm Cost Reduction Activities

Jeanne Wendel

Bell Journal of Economics, 1976, vol. 7, issue 2, 631-640

Abstract: In the literature which has developed and expanded the Averch-Johnson approach to regulation, it is commonly assumed that the firm routinely maximizes profit subject to an exogenously determined regulatory control parameter. In reality, however, the firm's expected reaction to regulatory decisions affects those decisions so that the firm is able to influence regulatory behavior. The value of the regulatory control parameter is not, therefore, exogenous to the firm. It is accordingly more appropriate to analyze the regulatory process in the context of game theory than in terms of the simple maximization of the regulator's objective function.

Date: 1976
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