Regulation Policy and Economics of Regulation
Class No. 1 (file 1): Introduction
Objectives of Today’s Class(1) To understand an overview of this course,course and a basic
frame of mind upon taking the lecture(2) To comprehend a relationship between regulation andcompetition policy

REGULATION POLICY & ECONOMICS OF REGULATION

1Notice(1) The files I deal with in the classes I take charge will be put on view inmy website (http://dbs.iss.u-tokyo.ac.jp/ ~matsumur/PUBR2009.html). If
you forget the address at all, it can be traced through the website ofInstitute of Social ScienceScience. There will be no handouts of hard copies
from the next class on, and each of you will be expected to download theappropriate files which I’ll do my best to upload in 48 hours before eachclass.
class(2) The term-end exam is planned on in February, most likely on a same
Friday when this lecture gets held, the date of which will be notified assoon as it
i bbecomes fi
finalized.
li d(3) And which will be principally conformed to the schedule of Faculty ofEconomics.
(4) While the class is being planned to be cancelled on November 20,
please pay attention to a notice on the billboard as the change is notimprobable.
p
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Rules Regarding This Course(Part Matsumura Takes Charge)(1) Ask questions and speak out any time during the class.
(2) There’ll
Th ’ll b
be occasions
ith
thatt I callll you.
(3) I won’t check attendance, but will evaluate voicing youropinion during the class as an overall class contribution
mark. I’ll welcome any kind of remarks.
((4)) I’ll also welcome yyour qquestions and comments after theclass as well. There are cases where some opinions thatdeserve extra points if voiced during the class may not get
any if donedafterft theth class.
l

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Objective of Course
To learn a viewpoint to analyze the actual regulations ofJJapanbyb utilizing
tili i ththe ttools
l off microieconomics
i andd ththeory offgames
Economic Regulations▪Economic→Correction of errors in marketplace: improvement ofeconomic efficiencyy▪Social Regulations→Achievement of social objectives outside of economic
efficiency
ffi i
In the classes I, Matsumura, take charge, the former(Economic Regulations) will be primarily focused
focused.
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Developments of Course

In 2005: Regulation and Competition Policy (4 credits)
In 2006: Regulation Policy (2 credits)
From 2007 onward: Regulation Policy and Economics
of Regulation (2 credits)

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Feature of Microeconomics
Decision making (choice) by an individual economic unit→Structure
St toff wholeh l societyi tMethodological individualism in an exaggerated way
On one hand,hand a choice anchored by individual economy
relies upon the structure of whole society.
While decision making
g by
y an individual economic unit cannot
be realized unless the structure of whole society is finalized,
the structure of whole society cannot be determined withoutd i i making
decisionki bby an iindividual
di id l economici unit.
it⇒System of concurrent decision
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6

System of Microeconomics
It is capable to analyze every decision making in principle.
First, one starts from a choice as to what and how much toproduce and consume.
▪Consumer’s theory and producer’s theory (individual’sd i i making)decisionki )▪ Theory of market equilibrium (to close the system ofconcurrent decision→ First theorem of welfare economics = Market equilibrium
is Pareto-efficient as long as the following three conditions
are met:(a) complete market, (b) perfect competition, (c) complete
information
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Market Failure: (1) Imperfect Competition
Perfect competition: Each and every economic unit is a
price taker.
P i consumer: APrice
An economici unit
i thath considers
idthath iitsown behavior does not influence the price.
P hPurchaser((seller)ll ) iis a pricei ttaker.
k→A consumer (producer) who does not consider that
his/her own purchase volume (production volume)
influences the market price.
Imperfect competition: There exists at least one consumer
who is not a price consumer (price controller), i.e., a very
normal world.
Theoretical grounds for perfect competition:((a)) Cournot’s Limit Theorem, (b)( ) Bertrand Model, (c)( )Evolutionary Stability, Relative-Profit Maximization Model
8
REGULATION POLICY & ECONOMICS OF REGULATIONRResponsetto M
Marketk tF
FailureilAccompanying
Ai
Imperfect Competition(1) To remove factors standing in the way of competition,and promote competition or maintain competitive
circumstances, thereby alleviating losses caused byimperfect competition
PPresupposing
i ffree competition
titi → Realm
R l off competition
titi
policy and antitrust law(2) Tough to maintain competitive circumstances→To give up the idea of competition, and by presupposing thestate of imperfect competition, alleviate losses in economic
welfare through regulation→Realm of Regulation Policy
9REGULATION POLICY & ECONOMICS OF REGULATION

Continuity Between Competition Policy andRegulation Policy
Vast intermediate region

０Realm of competition policy

１
Realm of regulation policy

REGULATION POLICY & ECONOMICS OF REGULATION

10Continuity Between Realm of Competition Policy
and That of Regulation Policy(a) Continuous substitutability between regulation policy andcompetition policy(1) To have an understanding of a possibility that, even in thefields of natural monopolyy markets where restriction has
been considered imperative, competitive mechanism works.
~Theory of Contestable Market (Class No. 2)
UUpon
meeting
ti certaint i conditions,diti
it iis possible
ibl tto changehththerealm of regulation policy to that of competition policy.
Dealing with the same issue
issue, the selection as to which one issuperior, either competition policy or regulation policy, hasturned out to change up to varying degrees of given
indicators.
REGULATION POLICY & ECONOMICS OF REGULATION

11Continuity Between Realm of Competition Policyand That of Regulation
gPolicyy(a) Substitutability between regulation policy and competition
policy(2) Substitutability between barriers to entry and competition
policyy
In a market where entry and exit are free, a certain typeof competition policy exerts no influence on consumer
surplus.
l~Where barriers to entry are removed, there is no need for acertain type of competition policy (Davidson and Mukherjee
Mukherjee,
2007, IJIO).
(3) Continuity of policy measures
An offer of wholesale service (close to a realm of freecompetition) or a connection (close to a realm of regulation)~ At ththe same titime, it’
it’s a means off didiscretionti regulationl ti (Cl(ClassNo. 11)
12
REGULATION POLICY & ECONOMICS OF REGULATION

Coexistence of Competition Policy withRegulation Policy((b)) Regulation
gp
policyy and competitionpp
policyyp
play
ycomplementary functions.
A scheme to introduce partial competition has progressed ina field of a natural monopoly market where control byregulation had traditionally been considered to be
imperative ~ Telecommunications
imperative.
Telecommunications, electric powerpower, and citygas
Nonetheless,, without definite regulation,g, a competitivepmechanism does not work at all. → Necessity to enforce
regulation policy and competition policy at the same time
~ Argument
Aover essential
i l ffacilities
ili i
Inversely, there is a scheme that is fundamentally competitive,
but including partial regulation
regulation.
(E.g.) Last Safeguard Regulation, some price cap regulation
REGULATION POLICY & ECONOMICS OF REGULATION

13Interactivity Between Competition Policy
Realm and Regulation Policy Realm(c) Numerous effects of network externalities turn up in
the traditional realm of free competition.
PPossibility
ibilit off ex-postt facto
f t competitive
titi restrictiont i ti ~ Same
Sissue as seen bottleneck facilities in communication,electricity etc
electricity,etc., city gas
gas, and railway
Possibility to extend experiences of bottleneck restriction tootheroe fields
e ds ((i.e.,e , tooe
extende d thee realm
ea oof regulation
egu a o popolicycyto that of competition policy)((E.g.)g ) Is it all rightg to leave up
p to a ggeneral statute suchproblems as Microsoft, Google, Apple?

REGULATION POLICY & ECONOMICS OF REGULATION

14Continuity Between Realm of Competition Policyand Policy Leaders of Regulation Policy(d) Competitive competition policies(1) CompetitiveC
titi assessmentt iin bback
k off regulationl ti reform
f→Government offices involved in the undertakings also go
on to conduct competitive assessment
assessment.
(2) Competition policies meant for specific industries vs.
ones under general statutes(3) Competition between the merger examination andindustry revitalization/enhancement of competitivenessREGULATION POLICY & ECONOMICS OF REGULATION

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Indivisibility Between Competition Policy andRealm of Regulation Policy
Barriers are being lowered between competition policy andregulation policy.
→Learning the two separately is unadvisable.
⇒Competition/regulation policies in the 2005 academicyear
A course of 4 credits is undesirable in terms of curriculum.
⇒From the 2006 academic year, it has been divided into
Competition Policy (2 credits) and Regulation Policy (2credits).
And yet, in reality, it’s desirable to learn the twosimultaneously, nonetheless.
(S(Seconddbbest way)) ToT venture to takek up some topicsihighly relevant to Competition Policy ← Whichregrettablyg
y is far from enough,g , though,g , due to a tightgschedule.
REGULATION POLICY & ECONOMICS OF REGULATION

16Externalities
Typical example of market failure that occurs when thecondition in (a) is not met.
E tExternalities
liti (environmental(it l pollution,ll ti
or ththe liklike),) public
bligoods⇒As to private economic entities
entities, it’s
it s necessary for
Government to directly impose restraints, or indirectlycontrol
coo by taxation.
a a oGovernment actions are important in the context ofregulationgas in environmental regulations;gthe subject
jisto be discussed in such forms as network externalities
within the range of this course.
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Market Failure Due to Incomplete Information
Complete
pinformation: all the ppeople
p have the sameinformation.
Perfect information: all the people have all the information.
I f
Information
ti being
b i incomplete
il t ~ IInformationfti beingb iasymmetrical ~ Information being maldistributed▪TypicalTypical examples of market failure attributable tomaldistribution of information(a) Moral hazard(b) Antiselection (adverse selection)▪Response to maldistribution of information⇒Signaling ⇒ And which causes another new marketfailure (Law and Economics 2)
Point in q
question uponp consideringg regulation
gp
policyy(Classes No. 5 and 13)
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Eligible Students (School of Public Policy,
G d t School)
GraduateS h l)▪Desirable to take courses on rudiments of economics, or
microeconomics (probably sufficient with microeconomics
leaned in undergraduate years)▪Desirable to take a course on competitionpp
policyy▪Grad students of 2nd year, as well as those of 1st year, arewelcome. ~ The course aims to be beneficial to students
with job hunting/civil
hunting/civil-service
service examinations imminent
imminent.

Eligible Students (Undergraduate)▪Desirable to take courses on an industrial organization▪It is risky for students to commit their graduation to thiscourse (This doesn’t
course.
doesn t mean that taking the credits is difficult:it means that I won’t grant the credits automatically even if a
student writes on an answer paper, “Please give me thecredits as I already got the place of employmentemployment.”))REGULATION POLICY & ECONOMICS OF REGULATION

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Basic Knowledge
g Requiredq▪Rudiments of microeconomics: price taker, marginal
revenue marginal cost
revenue,cost, average cost
cost, fixed cost
cost, variable
cost, demand curve, supply curve, consumer surplus,
producer's surplus, market failure, externalities, publicgoods, expected utility, asymmetrical nature ofinformation, (incomplete nature of information, moral
hhazard,d antiselection
ti l ti ((adversedselection),l ti ) signalingili▪Rudiments of game theory: strategic form game,
extensive form game,
game Nash equilibrium,
equilibrium reaction curve
curve,
backward inductive, sub game perfect equilibrium,
commitment, empty threat, repeated gameOut of the above-listed terms, if there are 5 or more thatyyou have not heard of, pplease consult with the instructor
in charge (“don’t remember” being permissible).
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REGULATION POLICY & ECONOMICS OF REGULATIONTextViscusi, W. K., J. E. Harrington, and J. M. Vernon,
Economics of Regulation and Antitrust, 4th Edition,MIT Press, 2005.

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Schedule 1(Basic Theories)
Class No. 1 (Oct 9): Introduction, regulatory impact
assessment (RIA)
Class No. 2 (Oct 16): Economic analysis of oligopolistic
market ((Text’s chaptersp1,, 2,, 5))Class No. 3 (Oct 23): Market competitiveness and economic
welfare (Text’s chapters 5, 6, 7, 12)(Theories of Regulation)
Class No. 4 (Oct 30): Basic theory of regulation (Text’schapter 10)Class No. 5 (Nov 6): Natural monopoly (Text’s chapter 11)
Class No. 6 (Nov 13): Network externalities and switching cost
(Text’s chapters 12, 15, 18)
Class No. 8 (Dec 4): Vertical merger, essential facilities andaccess regulationl ti (Text’s(T t’ chapters
h t8,8 12,12 1515, 18)
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Schedule 2(Various(ViR
Regulations
l tiandd ththeiri R
Reformfiin JJapan))Class No. 9 (Dec 11): Regulation of electric power market((Text’s chaptersp12,, 18))
Class No. 10 (Dec 18): Regulation of gas market (Text’schapters 12, 18)
Class NoNo. 11 (Jan 8): Regulation of telecommunications
market (Text’s chapter 15)
Class No. 14 (supplementary lecture period): Regulation oftransportation/traffic industries (Text’s(Text s chapter 17)(Social Regulations and Method of its Assessment)
Class No. 7 ((Nov 27):) Regulatory
gy impact
passessment,, riskassessment
Class No. 12 (Jan 15): Regulation on environment, healthand safety
Class No. 13 (Jan 22): Asymmetrical nature of informationand design of market institution
Class No. 15 (term-end exam period): ExamREGULATION POLICY & ECONOMICS OF REGULATION23