Abstract
Economists have long recognized that regulation is an imperfect solution to market failure. Do the inefficiencies of regulation outweigh the inefficiencies of market failure? In this paper, we develop a stylized model of a monopolist offering two services, one more widely demanded than the other. We compare aggregate surplus from unregulated monopoly with aggregate surplus from a median voter model of price setting in a (perfectly) regulated monopoly. We find that (i) median voter pricing can yield substantially lower aggregate surplus than monopoly pricing; and (ii) empirical evidence of the recent evolution of US telecommunications prices confirms the model.
JEL Classification Codes: D72, L51
Keywords: Regulation, Political Economy, Median Voter, Telecommunications, Pricing.
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