Competition policy, regulation and the institutional design of industry supervision

Abstract

We study the welfare impact of enforcing a competitive behavior from an unregulated fringe competing with a regulated dominant operator, with imperfectly differentiated goods. The fringe is potentially collusive but may be supervised by a competition authority. We show that the complementarity/substitutability between regulation and competition policy strongly depends on the nature of the market interaction.Forcing the fringe to adopt a competitive behavior always benefits consumers. However, it also affects the amount of subsidy that must be provided to the regulated firm for cost-reimbursement purposes, which has a social cost when public funds are costly. With complements, antitrust intervention is always welfare-improving. It is also preferable with weak substitutes, but is detrimental to welfare for strong substitutes.