External markets and regulation

Journal Article (Journal Article)

Regulated firms often sell to 'external' markets in addition to their regulated or 'internal' markets. The welfare of consumers in these 'external' markets is typically outside of the regulator's domain of concern. As a result, 'external' markets provide the regulator with additional policy options for the strategic influence of firm behavior in the presence of asymmetric information. Without an 'external' market, asymmetric information introduces an incentive cost and, consequently, the optimal policy is forced to distort 'internal' production below the first-best level. We show that profit opportunities presented by an 'external' market can be used to absorb some (all, when the firm is an 'external' price-taker) of the incentive cost, and thus insulate the 'internal' market from quantity distortions. © 1988.

Full Text

Duke Authors

Cited Authors

  • Anton, JJ; Gertler, PJ

Published Date

  • January 1, 1988

Published In

Volume / Issue

  • 37 / 2

Start / End Page

  • 243 - 260

International Standard Serial Number (ISSN)

  • 0047-2727

Digital Object Identifier (DOI)

  • 10.1016/0047-2727(88)90073-4

Citation Source

  • Scopus