Entry, Pricing and Incentives: The Role of Regulatory Commitment

This paper studies the optimal regulatory policy in a market where entry may occur. The regulator regulates the incumbent, but not the entrant in the event of entry. We show that the effect of entry on prices and incentives for cost reduction depends on the extent of the regulator's commitment: if it is possible to commit to the chosen policy, then the market outcome following entry is less competitive than it would be without the possibility to commit: price is higher and incentives for cost reduction weaker.