Introduction

It is sometimes desirable, on the ground of minimizing costs, to grant a single firm the exclusive right to serve a certain market. But how does one prevent an unleashed monopolist from exploiting consumers, and how does one assure that the monopolist operates on an efficient scale?

In the older literature on industrial organization, economists were primarily concerned with analyzing observed regulations. The most thoroughly researched examples are rate-of-return and price-cap regulation. The normative problem of how to design a satisfactory regulatory mechanism was only addressed in a meaningful framework in recent years, inspired by advances in the theory of incentive contracts under incomplete information.

Regulation is widespread in the U.S. and in western Europe, ranging from air and rail transportation to insurance, banking, and telecommunications. During the 1980s, many of these regulations came under heavy fire, which is why that decade is sometimes called the “age of deregulation.” Prime examples of large-scale deregulation are the breaking up of the Bell Telephone system and the removal of entry and price regulations in the U.S. airline industry. In western Europe, the EC's program of economic and legal integration is a major force in the deregulation of industries like insurance, electric power, trucking, and banking. However, the growing dissatisfaction with the long-term effects of deregulation in the U.S. will probably slow down and change the process of deregulation in western Europe.