ABSTRACT
Regulated monopolies are constantly under the threat of entry; often regulatory protection constitutes the only barrier to potential entrants. One explanation for such protection derives from Posner’s (1971) view of regulation as a taxation scheme. According to this view, regulators set prices as if the overall market were divisible into two (or more) segments: In one segment prices are set artificially high in order to generate profits, which are then used to subsidize the other segment in which prices are set artificially low. The regulator’s incentive to thus tax one segment and subsidize the other could be driven by a variety of motives: a sense of equity, a desire to ensure universal service, or by the fact that the subsidized segment constitutes a stronger political base.
