Cartelization by regulation

This paper formalizes and studies the argument of cartelization of industries through captured agencies. An agency can affect entry by a producer of a differentiated commodity in the market of a regulated natural monopoly through the manipulation of information it produces about the benefit of entry. Entry may be socially efficient because it enhances product diversity, or inefficient because it creates a duplication of fixed costs. We first show that because of informational asymmetries the agency will tend to prohibit entry. However with a rational political principal, the threat of regulatory capture increases the likelihood of entry. The effect of regulatory capture on incentives in the natural monopoly is also studied and the results are discussed and extended in various ways.