Regulating Dynamic Markets: Progress in Theory and Practice

25 May 2010
By Dr. Lewis Evans with Dr. Robert Hahn of the University of Manchester

A key question facing regulators is how to create an economic environment that encourages appropriate investment and innovation. In this paper, NERA Special Consultant Dr. Lewis Evans and Dr. Robert Hahn of the University of Manchester analyze the importance of technological change for both competition and regulation, with a particular focus on the regulation of telecommunications and the Internet. The authors recommend that dynamic efficiency should be used as the appropriate benchmark for judging the effectiveness of different regulatory approaches. Contrary to conventional wisdom, they find that incentive regulation, such as price caps, is not particularly good at promoting dynamic efficiency; nor is traditional cost-of-service regulation. As an alternative, the authors suggest that antitrust, judiciously applied, is likely to be better at promoting dynamic efficiency.