1Regulation and Inefficient Entry: Economic Analysis and British Experience*

This paper discusses recent British policy towards the introduction of competition into regulated industries. The dangers of regulatory policy for inefficient entry are considered under three broad headings: problems with entry caused by (i) the protection of incumbents, (ii) the protection of entrants, and (iii) the protection of consumers. Included in the analysis are discussions of temporary monopoly franchising, of policies that involve the licensing of just a few firms, of cross-market entry restrictions placed on incumbents, of market share targets imposed on incumbents, of the danger of “predatory ” behaviour when the incumbent operates under an average price cap, of the encouragement given to entrants when the incumbent cannot engage in price discrimination, of the economic distortions caused by universal service programs (such as geographically uniform prices), and of the relationship between the incumbent’s retail tariff and its network access charges. 1