The Entry-Deterring Effects of Environmental Policy

Posted by D. Daniel Sokol

Ana Espinola-Arredondo, Washington State University - School of Economic Sciences and Felix Munoz-Garcia, Washington State University - School of Economic Sciences describe The Entry-Deterring Effects of Environmental Policy.

ABSTRACT: This article summarizes results of a study that investigates the signaling role of environmental policy in promoting, or hindering, the ability of a monopolist to practice entry deterrence. We show that environmental policy can facilitate the incumbent firm’s concealment of information from potential entrants, thus deterring entry, and yet entailing welfare improvements. When the regulator is absent, we demonstrate that firms’ entry-deterring practices increase pollution relative to a complete information context. Hence, under certain conditions, environmental regulation becomes more beneficial in incomplete than in complete information settings. Furthermore, our results examine how this welfare benefits vary as firms become more symmetric in their production costs.