American Economic Association

Review
Reviewed Work(s): Regulation and Markets. by Daniel F. Spulber
Review by: Roger G. Noll
Source: Journal of Economic Literature, Vol. 28, No. 4 (Dec., 1990), pp. 1757-1759
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/2727471
Accessed: 20-03-2018 04:17 UTC

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 Book Reviews 1757

(4) The trucking industry as a whole is not Compared to the book's virtues, this is a mi-
adversely affected. nor criticism. The authors have written an ac-
cessible book that no specialist can afford not
Chapter 4 evaluates several policies con- to read and that would make a valuable addition
cerned with road wear that would be simpler to graduate and undergraduate courses in trans-
to administer than the policy just described. portation economics and urban economics.
One that is particularly important is based on MARVIN KRAUS
the fact that, for any given truck type and gross Boston College
vehicle weight, the marginal-cost road-wear tax
varies from road to road. Questioning whether Regulation and markets. By DANIEL F.
such variation is practical, the authors deter- Spulber. Cambridge, MA and London: MIT
mine how the results of the preceding chapter Press, 1989. Pp. xviii, 690. $45.00. ISBN 0-
are affected by requiring uniformity of the tax 262-19275-6. JEL 90-0284
structure across roads. Remarkably, the effi- Daniel Spulber's new book spans the entire
ciency gain is only about one percent less than spectrum of regulatory policies. It is intended
with marginal cost pricing of road wear. The to be a definitive treatment of all aspects of
policy is not as attractive politically, resulting regulation-price-setting, franchising, safety
in significant losses to the trucking industry. and health, environmental, antitrust-that
In Chapter 5, Small, Winston, and Evans would be appropriate topics in a graduate
turn to their other main proposal: congestion course in public policies toward business. But
pricing. They argue that the political acceptabil- the book also serves another purpose, which
ity of congestion pricing is likely to increase, is to lay out Professor Spulber's personal vision
citing as reasons the severity of the congestion of regulatory policy. To some degree, this vision
problem, technological advances in automatic is already expressed in a dozen publications
vehicle identification, and problems in highway during the 1980s in various professional jour-
finance. A number of studies that estimate the nals, parts of which are reproduced here. Nev-
impact of congestion pricing are summarized; ertheless, most of this is new, and it serves to
based on these studies, the authors suggest that provide a far more integrated presentation of
congestion pricing could produce annual bene- "the world according to Spulber" than could
fits of $5 billion. be divined from a collection of his most impor-
Chapter 6 is concerned with the highway fi- tant papers. However, the dual purpose leads
nance effects of the overall policy. Using a high- to compromise between objectives-a compro-
way cost model, the authors investigate the ex- mise that makes this a book worth reading, and
tent to which a road of optimal durability and parts of it worth assigning in a graduate class,
capacity is financed out of marginal-cost road- but that, in my opinion, precludes using it as
wear and congestion taxes. The model is applied the primary foundation for a graduate course
to an urban expressway and a principal urban in regulation.
arterial. With base case parameter values, there Regulation and Market's considerable mass
is never a deficit of more than seven percent is divided into five parts. The material in the
of highway costs. introduction that is not a summary, plus Part
The time and vehicle operating costs that us- I, deal with the core building blocks for study-
ers incur under free-flow conditions are ignored ing regulation. One is the welfare economics
in Chapter 6 based on the incorrect premise of market failure as a normative justification
that they are of no consequence to the analysis. for government intervention. Another is the le-
The authors state, "we exclude those costs to gal technology of regulation as embodied in the
users that are invariant with congestion, be- administrative process. Still another is the poli-
cause they are constant in this analysis and do tics of policy formation as described by econo-
not enter the public budget" (p. 103). Viewing mists and political scientists who to some de-
these costs as constant in the analysis is incon- gree use microeconomic reasoning to analyze
sistent with the book's own model of these political processes. The last is the economic the-
costs, which recognizes their dependence on oretic technology for analyzing regulatory pol-
durability. icy as a bargaining game.

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 1758 Journal of Economic Literature, Vol. XXVIII (December 1990)

Here Spulber sets forth his own particular plied to the other elements of regulatory policy.
spin on understanding regulatory policy, which The book then concludes with a summary of
is to view policy outcomes as the result of a the main ideas, and Spulber's personal views
bilateral bargain mediated by a regulator. Thus, about future directions in regulatory policy.
regulation is defined as having two essential The last three parts (especially Parts III and
components: it dictates or constrains aspects IV) are much more controversial and conse-
of market transactions (e.g., markets, not firms, quently less useful as textbook material because
are regulated), and it undertakes these activities of the limitations of seeing regulatory policy
through administrative processes (e.g., highly solely as a problem in bargaining theory. Most
specific legislative mandates and court decisions of the research in the last decade in this very
are not regulations). active field is simply not represented, or repre-
The next part of the book deals with the eco- sented only in cursory passages (typically in a
nomic theory of pricing and entry. It contains footnote). There is essentially no mention (let
a very good summary of the core material that alone serious treatment) of empirical issues in
would normally occupy the first few lectures regulatory policy, nor of the "prices versus
of a course in regulation: the relations between quantities" issue in social regulation. And the
prices and cost functions, the definitions and recent literature on incentive regulation is ig-
implications of key concepts such as subsidy- nored except insofar as the work by David
free prices, first and second best optimal pric- Baron and Roger Myerson (1982) concerning
ing, fully distributed cost pricing, contestability cost revelation is related to Spulber's work on
and sustainability, economies of scale, scope asymmetric information in mediated bilateral
and "sequence" (Spulber's term for economies bargaining between producers and consumers.
of vertical integration), the core of pricing Finally, the section on antitrust would be haz-
games, and the mechanics of models of competi- ardous to the careers of students seeking em-
tion for monopoly franchises. The contents of ployment in the field of industrial organization
this section are broadly similar to William Bau- and regulation. It basically writes off all anti-
mol, John Panzar, and Robert Willig's Contest- trust issues except horizontal combination and
able Markets (1982), but with some additional collusion as implausible, buying into Robert
wrinkles and much less detail. These chapters Bork's (1978) view of these issues but without
are strong candidates to be assigned to a gradu- bothering, as Bork does, to provide serious,
ate class in regulation. in-depth justification for these conclusions.
Part III deals with economic regulation and Most of the discussion pertaining to exclusion-
with what has come to be called "social regula- ary tactics, price discrimination, and vertical
tion"-environmental protection, product restraints is cursory, and the theoretical models
safety and health, and workplace safety and presented tend to highlight one side of the is-
health. The latter two categories are somewhat sue. For example, after two paragraphs of very
infelicitously called "internalities regulation" by general description, the reputational models of
Spulber, to contrast with environmental regula- predatory pricing by the "Gang of Four" (David
tion as "externalities regulation." The essence Kreps and Robert Wilson 1982; and Paul Mil-
of this distinction is that internalities are failuresgrom and John Roberts 1982) are dismissed by
arising from transactions costs, opportunism, the "telling criticism" related to "the difficulty
and principal-agent problems between transact- in distinguishing predatory price reductions
ing parties. Regulation is thus analyzed as an from normal competitive price cuts" (p. 477-
institutional arrangement that helps transacting 78). The next few pages then go on to provide
parties overcome or better cope with these equally brief descriptions and criticisms of all
problems. of the important papers proposing tests for
The agenda of Part IV is antitrust policy. After predatory pricing. The trouble here, of course,
many, many pages of descriptive and some- is not that Spulber is clearly wrong-although
times didactic material on the basic institutions a few quite famous antitrust economists are sure
and issues in antitrust policy, this section gets to think he is-but that the presentation is both
to its core point, which is to model antitrust unbalanced and superficial, and therefore inap-
in the same bargaining framework that was ap- propriate for a graduate text.

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 Book Reviews 1759

Nevertheless, the entire book-including the nology and to explore some of the implications
section on antitrust-contains very interesting for the formulation of public policy in this area.
material applying Spulber's view of regulation The book contains the proceedings of the con-
as bargaining in a variety of theoretical circum- ference "Economics and Technology Policy" or-
stances. For this reason, this is a very useful ganized by the Centre for Economic Policy Re-
contribution, and one that I recommend be search and held in London in September 1986.
read by scholars in the field and and be included It consists of eight papers and a crisp introduc-
on reading lists of graduate regulation courses. tion by the editors. The papers are of generally
In the end, books with a strong point of view high standard, mostly nontechnical and accessi-
are almost always inappropriate as a text, and ble to the nonspecialist. However, they do focus
that is the problem here. But the point of view primarily on what economic theory suggests
is interesting, and much of the theoretical mate- about the appropriate scope for policy interven-
rial produces interesting, inobvious results in tion and say relatively little about the practical
relatively simple, straightforward settings. In aspects of policy implementation.
writing Regulation and Markets, Spulber has Although not organized in this way, the pa-
succeeded in giving us a coherent, comprehen- pers fall quite neatly into two categories. The
sive account of his perspective on the field, papers in the first group in effect adopt a static
which is a valuable undertaking. welfare perspective which emphasizes various
ROGER G. NOLL types of externalities in information-related
Stanford University markets, often in novel ways. These include
the contributions by Partha Dasgupta, John
REFERENCES Barber and Geoff White, Paul Stoneman, Bruce
Lyons, and Zvi Griliches, Ariel Pakes and
BARON, DAVID P. AND MYERSON, ROGER B. "Regulat-
Bronwyn Hall. The second group of papers em-
ing a Monopolist with Unknown Costs," Econo-
metrica, July 1982, 50(4), pp. 911-30. phasizes the dynamic externalities associated
BAUMOL, WILLIAM J.; PANZAR, JOHN C. AND WILLIG, with R&D, and the stochastic and nonergodic
ROBERT D. Contestable markets and the theory (i.e., "history matters") characteristics of the
of industry structure. NY: Harcourt, Brace Jovano-
process of technological change. This group
vich, 1982.
BORK, ROBERT H. The antitrust paradox: A policy consists of the papers by Henry Ergas, Joseph
at war with itself. NY: Basic Books, 1978. Stiglitz, and Paul David.
KREPS, DAVID M. AND WILSON, ROBERT. "Reputation Dasgupta emphasizes that decentralized
and Imperfect Information," J. Econ. Theory, Aug.
provision of R&D is in general nonoptimal due
1982, 27(2), pp. 253-79.
to special characteristics of information as an
MILGROM, PAUL AND ROBERTS, JOHN. "Predation,
Reputation and Entry Deterrance," J. Econ. The- economic commodity (e.g., increasing returns
ory, Aug. 1982, 27(7), pp. 280-312. in production and use by a given agent, and
nonrivalry in use across agents). He discusses
various inefficiencies, focusing especially on
620 ECONOMICS OF TECHNOLOGICAL CHANGE
those that can arise in the context of decentral-
Economic policy and technological perfor- ized choice among research projects and in the
mance. Edited by PARTHA DASGUPTA AND allocation of resources across projects. As an
PAUL STONEMAN. Centre for Economic Policy agenda for the study of technology policy, these
Research series. Cambridge, New York, and static welfare questions seem less central
Sydney: Cambridge University Press, 1987. (though perhaps analytically more tractable)
Pp. xiii, 243. $34.50. ISBN 9-521-34555-3. than the long-run dynamic externalities associ-
JEL 88-0842 ated with R&D and the design of suitable insti-
Technological competition plays a central role tutional setups to accommodate them.
in the recent academic literature on the theory Stoneman provides a brief analytic summary
of international trade and industrial organiza- of existing diffusion models, focusing on issues
tion, and is of obvious importance in their real such as heterogeneous adopters, the role of in-
world counterparts. This volume represents formation and uncertainty, and strategic behav-
one of the first attempts to review systematically
ior among adopters. He distinguishes between
the recent work on the economic theory of tech- two types of diffusion policies, those that focus

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