ABSTRACT
To this point, the analysis has focused on the interaction between a regulator and a single firm. We have seen how the multiple observations afforded by repeated interactions can enable the regulator to better limit the firm’s rents from private information. Another source of multiple observations for the regulator is comparison across firms. In settings where there is more than one regulated firm, the reports or actions of one firm can be compared to those of other firms. And where there is only a single incumbent firm initially, the regulator may find it advantageous to allow the entry of another firm. This is the case even when there are increasing returns to scale in the industry and the entrant’s expected costs exceed those of the incumbent. The reduction in rents to the incumbent that a viable threat of entry secures can outweigh the losses that arise from the entrant’s higher production costs.
