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Threat-based regulation and endogenously determined punishments

Research output: Working paper

Publication date2001
Place of PublicationLancaster University
PublisherThe Department of Economics
<mark>Original language</mark>English

Publication series

NameEconomics Working Paper Series


We present a theoretical model to show that through the adoption of simple regulatory rules, the threat of regulation as well as regulation itself impacts upon a firm s pricing strategy. The model is relevant to general antitrust policy, as well as the regulation of individual utility industries. While the paper focuses on the threat of revenue regulation, the principal results may also hold when regulation takes the form of penalties on prices charged. In the model the probability of regulatory intervention increases with the level of price charged, as does the toughness of any regulation imposed. This form of regulation, although not optimal, has the advantage of being relatively simple to apply. The proposed regulatory rules offer a form of transparent regulation that could circumvent fears of regulatory capture.