Firms, Unions and Regulators

Abstract

Over the last fifteen years there has been an extensive revision of the theory of optimal pricing in regulated industries. The traditional concern was with the design of optimal pricing rules, looked at as a problem of maximising a social welfare function subject to some basic constraints, represented by consumers’ demand and firm technology. The main criticism to this approach is that it completely overlooks the limits to perfect regulation, mainly arising from the asymmetric distribution of information between the regulator and the regulated firm. The new economics of regulation is, therefore, built upon the assumption of asymmetric information, and it has contributed to the establishment of new theoretical benchmarks for optimal pricing. One of the main achievements of this literature is, however, that it does not consider the firm as a passive subject in a “command-and-control” scheme, but as a strategic player in the regulatory game. Given the point we are up to now, there is, however, the need to extend this literature further, to take account of a wider spectrum of determinants of the strategic behaviour of the firm. In fact, the models belonging to the new economics of regulation are usually based on a very simple scheme of interaction between two parties only: the regulator and the firm, generally regarded as single entities.

I wish to thank Jean-Jacques Laffont and Massimo Marrelli for their commens on a previous version of this paper. The usual caveat applies