‘Bribing’ regulators

Abstract

The regulator’s welfare function is a convex combination of consumer surplus, profits shared with the regulator and profits retained by the regulated firm. This analysis seeks to determine the conditions under which the regulated firm is able to ‘bribe’ the regulator with profit sharing to raise prices and realize positive profits in equilibrium.

Keywords:

• price cap regulation
• telecommunications
• competition

JEL Classification:

• L51
• L96

Acknowledgement

I thank David Sappington and Dale Lehman for helpful discussions and Soheil Nadimi for expert research assistance.

Notes

¹ The profits shared with the regulator are referred to as ‘consumer dividends’ because they are ultimately passed on to consumers in various forms, including bill credits, refunds and infrastructure investments.

² The regulated firm may be able to choose from a menu of regulatory regimes, including pure price caps and price caps with earnings sharing (Sappington, 2002).

³ Lehman and Weisman (2000) and Onemli (2010) use data from the 1996 Telecommunications Act to show that regulators in pure price cap states set lower access prices relative to regulators in states with earnings-based, regulatory regimes, ceteris paribus.