Regulations usually apply to all members of an industry. Professors Ayres
and Braithwaite propose that in some situations "partial industry" regulation is superior
to
all-or-nothing regulatory policies. Partial-industry regulation governs only a part of an
industry,
leaving other parts either unregulated or disparately regulated. Regulating only an
individual firm
(or subset of firms) can engender a system of checks and balances in which the
regulated and
unregulated portions of the market each curb the excesses of the alternative form of
market
governance. Partial-industry regulation can thus promote efficiency by restraining
monopoly power
without giving rise to the evils of either captured or benighted regulation. The author's
theories of
partial-industry intervention gain support from an analysis of monopsonist behavior.
Governments interested in promoting consumer welfare should often emulate what a
monopsonist consumer would do. One way to reconceive of the regulator's decision
whether to
subsidize fringe competition is to ask if a hypothetical downstream monopsonist would
subsidize
upstream entry to "second-source" the product. A monopsony standard provides not
only a powerful
tool for analyzing how government might intervene to protect consumers, but also a
limiting
principle for analyzing when intervention is appropriate.
INTRODUCTION
Federal and state regulation of the United States economy often displays an all-or-
nothing
character: regulations govern either all members of an industry or none. A host of
federal agencies
pervasively regulate the conduct of entire industries. For example, the Securities and
Exchange
Commission regulates the securities industry, the Food and Drug Administration
regulates the
production of pharmaceuticals, and the Federal Reserve regulates the banking industry.
In addition,
many regulations promulgated under federal statutes, such as the Clean Air Act, mandate
or
prescribe certain dimensions of industry behavior. Even among industries that are not
extensively
regulated, those regulations that do exist tend to apply to all industry members or none.
Not surprisingly, the academic and political discussion of regulation mirrors this
dichotomous reality. The deregulation debate often implicitly considers only two
regulatory
alternatives: government must either impose industry-wide regulations or allow
unconstrained
markets to determine the allocation of scarce resources. The regulatory literature has
identified
significant costs associated with each alternative. Laissez-faire policies that leave
monopoly or
oligopoly power unchecked in private hands might allow industry members to raise their
prices
above the competitive level. But industry-wide regulation might have the same effect:
regulators
can be "captured" by the very firms they attempt to regulate. Captured regulators can
organize a
cartel among producers in an industry and legally mandate that these firms sell at an
inflated price.
For those who fear these costs of capture, the only thing worse than letting market power
coalesce
in private hands is giving a corrupt Leviathan the power to define the parameters of
market
transactions.
Even uncaptured regulators face significant informational hurdles in promulgating
efficient
regulations. Regulatory agencies may have great difficulty ascertaining the proper
"competitive"
price because production costs are not observable. If the agency guesses too low, firms
will not
recoup their costs; if the agency guesses too high, consumers again will be forced to
buy at
cartel-like prices.
This Article explores a middle path between the Scylla of full industry regulation and
the
Charybdis of laissez-faire policies. We propose that in some situations "partial-
industry" regulation
may be superior to all-or-nothing regulatory policies. In its broadest sense a regime of
partial-industry regulation would allow a government to regulate only part of an
industry,leaving the
rest unregulated. Under partial-industry regulatory schemes, government purposefully
treats firms
in an industry differently.
In some regulatory settings, regulating only an individual firm (or a subset of the
firms) in
an industry can promote efficiency by restraining monopoly power without giving rise to
the evils
of either captured or benighted regulation. Especially in a dynamic or evolutionary
sense,
partial-industry regulation might be more resilient to private and public abuses of market
power.
Our theory derives its strength from both camps of the regulation/deregulation debate.
Like
advocates of regulation, we accept that unregulated markets sometimes fail to produce
competitive
prices. But like advocates of deregulation, we also acknowledge that unregulated
competitors have
strong incentives to chisel away at cartel agreements and thereby destabilize collusion.
Unlike
full-industry regulation, which extinguishes many benefits of interfirm competition,
partial-industry
regulatory strategies try to harness and foster the welfare-enhancing effects of
competition.
Partial-industry regulation begins with the premise that the existence of a single or a
few
competitive firms can dramatically affect the competitive conduct and performance of an
entire
industry. The central insight of partial-industry regulation is that government can
accomplish many
regulatory goals by maintaining the competitive performance of a subset of the firms in
an industry.
Far from denying the powerful effect of competition, partial-industry regulation uses the
regulated
firms to affect the behavior of other firms in the market. Unlike across-the-board industry
regulation, however, mistaken or captured government decisions do not necessarily
adversely affect
the unregulated firms. Instead of completely displacing the market, partial-
industry regulation maintains a structure of "checks and balances" between the two
extremes of
regulation.
Partial-industry regulation can be seen as a form of regulatory delegation. The
regulated
firms in the industry indirectly bear the burden of assuring that the unregulated firms
comply. The
compliance of unregulated firms is assured because competition forces them to match
the offers of
the regulated firm. Therefore, unlike other strategies of delegation, the regulated firms
do not need
to appreciate their disciplining function.
A major thesis of this Article is that government should adopt a "monopsony
standard" for
consumer protection interventions. Under this standard, government should only
intervene on
consumers' behalf to improve the workings of a market in situations where a
monopsonist buyer
would rationally intervene on its own behalf. The monopsony standard provides strong
indications of when and how government should intervene. Monopsonists represent the
quintessentially empowered consumer. By studying how these consumers with market
power
protect themselves, government can better target and tailor interventions on behalf of
less powerful
consumers. We argue that a monopsony standard provides particularly strong evidence
supporting
the use of partial-industry regulation because monopsonists often undertake their own
private analogues to partial-industry interventions.
A monopsony standard for consumer protection is also attractive because it provides
a
limiting principle indicating when government should intervene. As discussed below, the
private
practice of second-sourcing-subsidizing second sources of supply-shows that treating
sellers
differently can indeed be rational in individual cases, and provides government with
guidelines
for distinguishing situations in which government-sanctioned disparate treatment is
likely to be
rational from situations in which it is not. The monopsony standard thus provides a
powerful source
of necessary (but not sufficient) conditions for intervention. Even when a monopsonist
would
intervene, the particular costs of government intervention might preclude the use of
partial-industry
regulation. Thus, the monopsony standard more concretely provides a limiting principle
to
government actions, suggesting that if a monopsonist would not intervene to change a
market
outcome, government should not either.
From the prevailing all-or-nothing regulatory mind-set, many forms of partial-industry
regulation might seem radical. This Article provides a theoretical justification for further
exploration
of partial-industry regulation, bolstering its thesis with examples of successful private
and public
interventions that disparately regulate the sellers in particular markets. For the most
part we argue
for government regulatory attempts that promote competitive pricing in industries. But
our larger
argument is that partial-industry regulation can be a useful policy tool to correct other
types of
market failure as well. Government intervention directed at a subset of firms in an
industry, for
example, can spur the development of additional safety precautions, innovation, or
information
without completely forgoing the checks and balances of private competition.
Our argument is not that partial-industry regulation is costless or that it should be
pursued
on an economy-wide basis. For one thing, partial-industry regulation raises
constitutional issues of
equal protection that are analyzed below. Additionally, as we make clear, there are
significant costs
to partial-industry regulation that will clearly preclude its use in several regulatory
contexts. But to
be viable, partial-industry regulation must only succeed in doing better than the all-or-
nothing
alternatives. In some circumstances, we prefer the rifle to either the shotgun or no gun
at all.
We begin by setting out both a theoretical and practical typology of partial-industry
regulation. By analyzing both the costs and benefits of such intervention, we show that
government
could use a diverse range of possible partial-industry interventions to promote
competition. We next
discuss the monopsony standard as a guide for government intervention strategy.
Potential equal
protection problems resulting from disparate treatment of firms within
the same industry are then analyzed. We end by discussing a series of applications-
industry studies
of oil, passenger airline service, news media, and long-distance telephone service-in
which
single-firm or partial-industry regulation is currently in place or might be justified.
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