Regulating Dynamic Markets: Progress in Theory and Practice

Abstract

A key question facing regulators is how to create an economic environment that encourages appropriate investment and innovation. In this paper we analyse the importance of technological change for both competition and regulation with a particular focus on the regulation of telecommunications and the internet. We recommend that dynamic efficiency should be used as the appropriate benchmark for judging the effectiveness of different regulatory approaches. Contrary to conventional wisdom we find that incentive regulation such as price caps is not particularly good at promoting dynamic efficiency. Neither is traditional cost-of-service regulation. As an alternative we suggested that antitrust judiciously applied is likely to be better at promoting dynamic efficiency.