The regulation of markets with interdependent demands

- We study the design of interdependent markets when regulated firms engage in lobbying.
- With asymmetric information centralized regulation yields a negative externality between firms.
- Decentralized regulation removes this externality and reduces lobbying.
- This benefit comes at the cost of a miscoordination between regulators.
- A trade-off results which favors decentralized regulation when goods are substitutes enough.

We examine the regulatory design of a market for products with interdependent demands, where regulated firms provide (imperfect) substitutes and can engage in lobbying activities. Under centralized regulation, a single regulator is established, whose mandate is to maximize aggregate welfare. Under decentralized regulation, each firm is assigned to a regulator charged with maximizing the welfare generated by that firm. With asymmetric cost information, centralized regulation results in a negative externality between firms when engaging in lobbying. Decentralized regulation removes this externality and reduces lobbying. Since this benefit comes at the cost of miscoordination between regulators, a trade-off results which favors decentralized regulation when goods are substitutes enough.