Deregulation, Endogenous Expectations and the Evolution of Industry Structure

Abstract

This analysis of deregulation as a government directed switch of regime from monopoly to competition treats the incumbent producer as a monopolist who anticipates that deregulation will occur at some future date and result in the deployment of substitutes, producing a competitive environment. The results suggest that the ceiling for the rise in world gas prices will fall, capping any domestic price rise. The model indicates that any drop in world prices will be moderated by an incumbent producer (e.g., OPEC) who uses market variables like price to improve his forecast of competitive entry. When the incumbent recognizes that higher monopoly prices raise the probability of entry, the resulting monopoly path of prices will lie closer to the postulated path of initial competitive prices, resulting in a less substantial drop in price when the switch of regime actually occurs. 27 references.