Consider an industry with many potential firms, each firm characterized by a cost structure with large fixed costs. In determining the socially optimal resource allocation, the number of firms is a crucial variable. In this paper a relationship is established between pure profits with a fixed number of firms and the desirability of increasing or diminishing the number of firms in the industry. Both first-best and nonnegative profit-constrained, second-best cases are considered. The results are related to price and entry regulation in such an industry

Mark J. Flannery, Credit Unions: Theory, Empirical Evidence and Public Regulation: Discussion, The Journal of Finance, Vol. 36, No. 2, Papers and Proceedings of the Thirty Ninth Annual Meeting American Finance Association, Denver, September 5-7, 1980 (May, 1981), pp. 554-556

Robert A. Taggart, Jr., Rate-of-Return Regulation and Utility Capital Structure Decision, The Journal of Finance, Vol. 36, No. 2, Papers and Proceedings of the Thirty Ninth Annual Meeting American Finance Association, Denver, September 5-7, 1980 (May, 1981), pp. 383-393

Carl M. Gambs, Credit Unions: Theory, Empirical Evidence and Public Regulation: Discussion, The Journal of Finance, Vol. 36, No. 2, Papers and Proceedings of the Thirty Ninth Annual Meeting American Finance Association, Denver, September 5-7, 1980 (May, 1981), pp. 552-554

Richard L. Peterson, Credit Unions: Theory, Empirical Evidence and Public Regulation: Discussion, The Journal of Finance, Vol. 36, No. 2, Papers and Proceedings of the Thirty Ninth Annual Meeting American Finance Association, Denver, September 5-7, 1980 (May, 1981), pp. 550-552

An opportunity to compare economic performance under substantially different levels of regulation is afforded by the differences in the regulatory environments of U. S. and Canadian railroads. We find that the less regulated Canadian railroads have achieved far higher productivity growth than have U. S. railroads. Furthermore, in spite of natural conditions favoring U. S. railroads, Canadian railroads have achieved a higher level of productivity. These findings for the typical U. S. and Canadian railroad are borne out by similar results for specific railroads. Had U. S. railroad productivity grown at the Canadian rate, U. S. railroad costs would be several billion dollars less each year

Regulatory lag is generally credited with providing monetary incentives for the adoption of cost-saving technological changes by regulated firms. Because regulators can not instantaneously adjust price ceilings in response to cost changes, these incentives are inherent to the process of price regulation in a dynamic world. A firm which decreases production costs through technological innovation will enjoy excess profits until the regulators lower price to a level consistent with the new conditions.' The longer the delay before regulatory response to a decrease in cost, the greater are the profits which can be derived from a cost reduction, and, therefore, the greater is the incentive for adoption of technological change.2 The passive nature of this incentive mechanism is an important characteristic. Although regulatory agencies typically have authority to force price decreases upon firms which do not take advantage of potential cost savings, this power is limited by the difficulty of proving that a firm is laggard, rather than the victim of unfortunate circumstances. Thus, the regulated firm which foregoes potential profit from adopting a costsaving innovation today may generally reap that profit at some convenient time tomorrow. Indeed, it is the main contention of this paper that, in many circumstances, a regulated monopolist can maximize the present value of profits only by delaying adoption of an innovation. That is, rather than completely adopting a cost-saving innovation when it becomes available, a profit-maximizing regulated firm will choose to adopt the innovation only gradually through time. The profitability of such delaying procedure may be illustrated by a simple example. Consider a situation in which the price of a firm's product is fixed by a regulatory authority, but periodically adjusted according to the following cost-plus-markup scheme. At each review, price for the following period is set equal to average cost of the previous period plus an allowed markup. That is, price in period i + 1 is set equal to m times average cost in period i (m ) 1). This situation is illustrated in Figure 1. A firm is initially producing output QO at cost CO(QO), with price set by the regulators at mCO(QO)/QO. Suppose a cost-saving innovation is discovered, which, if employed, would decrease average production cost to C1(Q)/Q. If the firm were to adopt this innovation immediately, it would earn a profit equal to the area of the rectangle ABCD in Figure IA. At the next regulatory review, price would be lowered to the level m times the new average cost (i.e., to P1), and profit would fall to that amount represented by the area AEFG. This amount of profit would be earned each period thereafter. However, suppose that the firm were to adopt this innovation in two steps rather than completely adopting the innovation when it first becomes available. This option is sketched in Figure lB. In the initial period, the firm adopts the innovation throughout approximately half its operations, thereby lowering average cost only to OH. In the next period, the firm completes the adoption process, lowering average cost to the final level OA. Although this procedure would yield profit equal only to HICD in the initial period, it would result in a price in the next period equal to P1 (i.e., equal to m times OH). Since average cost in that period would fall to OA, profit would equal AJKL. In the next period, price would be at the new equilibrium level OG, and profit would equal AEFG. This amount of profit would be earned each period thereafter. Given the demand and cost functions illustrated in Figure 1, the second alternative *Assistant professor of economics, Vanderbilt University. 'See William Baumol, and Alfred Kahn, ch. 2. 2See Elizabeth Bailey

To explain the evolution of U.S. deposit institutions and markets in the 1960sand 1970s, we feed into the regulatory dialectic assumptions about the objectives of federal banking regulation and about outside forces that disturb the adjustment process. The disturbing exogenous forces are accelerating change in the technological and market environment of commercial banking and increasing uncertainty concerning the future speed of enviromental change. We hypothesize that, in the face of these environmental changes, the adaptive efficiency shown on average by deposit-institution managers is greater than that shown by managers of the several competing banking agencies. Incorporating this differential adaptive capacity into the regulatory dialectic helps us to understand how increases in the pace of environmental change and in the degree of environmental uncertainty led regulatee responses to come more quickly and regulatory responses to come more slowly. The bottom line is that, when the environment changes rapidly and becomes more uncertain, traditional forms of U.S. banking regulation can be overwhelmed by technological and regulation-induced innovation

A. W. Sametz, Accelerating Inflation, Technological Innovation, and the Decreasing Effectiveness of Banking Regulation: Discussion, The Journal of Finance, Vol. 36, No. 2, Papers and Proceedings of the Thirty Ninth Annual Meeting American Finance Association, Denver, September 5-7, 1980 (May, 1981), pp. 393-395

This paper presents a conceptual and empirical analysis of the way in which coalitions of managers (i.e., firms) respond to regulation. The conceptual analysis provides a model of managerial behavior based on the assumption that these coalitions make cost/benefit analyses of activities in their self-interest. The model is used to develop hypothesized responses to the internal accounting control provision of the Foreign Corrupt Practices Act of 1977. These hypotheses, that the regulation would not directly affect the level of internal accounting controls, but would affect the expenditure of resources for efforts to "prove" compliance with the law, were generally supported by the empirical results