Deregulatory Capture

by Levi A. Russell

A recent post over at the Pro Market blog by Berkeley economist Steven Vogel makes some interesting points about regulatory capture and firms' preference for deregulation or additional regulation.

Vogel summarizes a few developments in the theory of regulatory capture since Stigler's 1971 article and suggests that we need to add deregulation to our regulatory capture models. That is, firms certainly lobby or attempt to influence political campaigns/parties/etc to reduce regulation. Stigler's theory is confined to firms' attempts to increase regulation to reduce competition. Vogel notes that this theory is tied to economic rather than social regulation. Economic regulation deals primarily with licensure, rules for firm entry, and pricing. Social regulation deals with external costs/benefits that firms impose on society. Vogel then argues that, while firms might prefer to increase some anti-competitive economic regulations (a-la Stigler 1971), they might also prefer to eliminate or reduce restrictions on social regulations that hamper their profits.

This makes sense to me as long as the social regulations firms seek to eliminate are actually pro-competitive or hamper firms' profits. Purely in terms of compliance costs, any additional rules impose some cost on potential entrants.

Which leads me to what I think is the crucial distinction: variable vs fixed costs. That is, whether a regulation is classed as economic or social matters far less than whether the regulation imposes fixed costs or variable costs on firms in the industry. Regulations that primarily impose fixed costs on firms are likely to be anti-competitive and beneficial to incumbents. Regulations that primarily impose variable costs on firms don't limit competition as much and instead reduce profits for incumbents and new entrants equally. I think there's a case to be made that variable-cost-imposing regulations are still tilted against new entrants due to intangible factors such as experience and distributed local knowledge, but I'm open to correction on that (and on anything else in this post, obviously).

Still, it's hard for me to completely agree with Vogel. As Bryan Caplan pointed out back in 2015, a firm can't act like a monopoly if it wants to become a monopoly. That is, for a firm to grow large enough to dominate a market, it must increase production and lower prices. The only reliable way to gain monopoly status is to use the political process to erect barriers to competition. Pushing for lower regulations risks lowering costs on competitors which could potentially give them a competitive edge. Ultimately it's all an empirical question.

 Dr. Levi A. Russell is the Gwartney Institute Professor of Economic Education and Research at Ottawa University