The impact of the removal of regulatory controls: Empirical and experimental evidence.

Abstract

This dissertation looks at the impacts of removing regulatory controls on market structure, market performance, and market power. It looks at the effect of removing price and quantity controls in several economies and in Posted-Offer experimental markets. Understanding the impact of regulatory controls, and their removal, is increasingly relevant in the light of the world-wide relaxation of regulatory barriers. I first look at the effect of removal of market controls in several economies all over the world and identify factors that can impede the deregulatory process. This is followed by a study of the effect of deregulation in the car and the scooter industry in India. The relaxation of regulatory controls is found to impact to market structure, product mix, and quality. Both the markets become increasingly competitive both in product mix and quality. The relaxation of regulatory controls has clearly benefited the consumers by increasing product choice and quality. Two types of quantity controls, firm-specific and market quotas, are identified. It is found that firm-specific quotas alter the market supply in a fundamentally different manner than do market quotas. The removal of price controls and firm-specific quantity controls is studied in an experimental posted offer market. It is found that firm-specific quotas affect the convergence of average contracted prices in Posted-Offer markets. Prices tend to converge from below the market clearing price. Secondly, markets under price controls are more efficient than under quantity restrictions. This is explained by looking at the effect on search space. Quantity restrictions affect the price search space in a different manner than do price controls. Quantity controls allow search in the price space thereby affecting the short run equilibrium in markets. Sellers tend to price themselves out of the market in the short run thereby affecting the short-run efficiency. Finally, I look at the effect on dynamic market power of removing quantity restrictions. It is shown that the measurement of market power in an environment with changing capacities can lead to misleading conclusions. What is perceived as a decline in market power may in fact not affect the market power of the incumbents. Thus near monopoly outcomes can be misleadingly viewed as declines in market power.