It remains a widely held belief that regulation is in the public interest and influences firm behavior toward socially desirable ends. However, in the early 1970s, Nobel laureate George Stigler and his colleague Sam Peltzman at the University of Chicago introduced an alternative capture theory of economic regulation. According to Stigler and Peltzman, the machinery and power of the state are a potential resource to every industry. With its power to prohibit or compel, to take or give money, the state can and does selectively help or hurt a vast number of industries. Because of this, regulation may be actively sought by industry. They contended that regulation is typically acquired by industry and is designed and operated primarily for industry's benefit.
Types of state favors commonly sought by regulated industries include direct money subsidies, control over entry by new rivals, control over substitutes and complements, and price fixing. Domestic "air mail" subsidies, Federal Deposit Insurance Corporation (FDIC) regulation that reduces the rate of entry into commercial banking, suppression of margarine sales by butter producers, price fixing in motor carrier (trucking) regulation, and American Medical Association control of medical training and licensing can be interpreted as historical examples of control by regulated industries.
In summarizing their views on regulation, Stigler and Peltzman suggest that regulators should be criticized for pro-industry policies no more than politicians for seeking popular support. Current methods of enacting and carrying out regulations only make the pro-industry stance of regulatory bodies more likely. The only way to get different results from regulation is to change the political process of regulator selection and to provide economic rewards to regulators who serve the public interest effectively.
Capture theory is in stark contrast to more traditional public interest theory, which sees regulation as a government-imposed means of private-market control. Rather than viewing regulation as a "good" to be obtained, controlled, and manipulated, public interest theory views regulation as a method for improving economic performance by limiting the harmful effects of market failure. Public interest theory is silent on the need to provide regulators with economic incentives to improve regulatory performance. Unlike capture theory, a traditional view has been that the public can trust regulators to make a good-faith effort to establish regulatory policy in the public interest.
A. The aim of antitrust and regulatory policy is to protect competition, not to protect competitors. Explain the difference.
B. Starting in the 1970s, growing dissatisfaction with traditional approaches to government regulation led to a global deregulation movement that spurred competition, lowered prices, and resulted in more efficient production. Explain how this experience is consistent with the capture theory of regulation.
C. Discuss how regulatory efficiency could be improved by focusing on output objectives like low prices for cable or telephone services rather than production methods or rates of return.