Partial Industry Regulation: A Monopsony Standard for Consumer Protection

Abstract

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 authors' 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.