The contributors include leading figures in regulatory economics. They and the book share a longstanding ambivalence toward the conflict between the theoretical case for regulation and the barriers of knowledge, expense, and rent-seeking that hinder attainment of those theoretical benefits. Rose makes this particularly clear in her introduction, in which she warns that regulation is likely to have unsatisfactory dynamic effects—particularly when it comes to innovation over time. That warning is repeated by many of the volume’s contributors. Nevertheless, some contributors ignore their own caveats and argue that more economic regulation is needed and current regulation can be improved, though several papers also argue that less regulation would be appropriate. In many cases, the writers refute or reiterate applications of ancient fallacies about the supposedly malevolent nature of competition without noting the broader supporting literature.

Rose’s introduction is followed by nine reviews of different aspects of regulation. These are all familiar, well-trodden areas, and all of the chapters deliberately synthesize prior work. Throughout the volume, familiarity with key issues is presumed and the coverage is necessarily selective. Therefore, the book is valuable as an overview of how several leading experts view the state of regulation in the areas treated. Only a few contributions are sufficiently self-contained to serve as guides for non-specialists.

Antitrust and airlines / Most reviews treat a specific industry, but the initial contribution—the shortest in the book, by Dennis Carlton and Randal Picker—tries to delineate the proper relative roles of direct regulation and antitrust. Unfortunately, the authors only provide overly terse, inconsistent, incomplete treatments of too many, mostly secondary, issues.

The authors begin the book’s tendency to state but then ignore the drawbacks of government intervention in markets; they tacitly accept the desirability of antitrust and regulation. In particular, the authors observe that judges in civil actions concerning some market activities are more likely to be independent but less likely to be knowledgeable about industry details than industry-specific regulators and, thus, regulation is preferable to civil action when expertise is needed. Unfortunately, Carlton and Picker’s exposition fails badly in making those arguments, let alone recognizing that other scholars strongly dispute them.

The chapter instead contains naive ruminations about the processes by which the U.S. Senate, House, and president (each modeled as a single entity) could optimally choose between antitrust and direct regulation, a discussion of the (obvious) reasons for seeking exemption from antitrust, an overview of actual exemptions provided, the process by which the Interstate Commerce Commission secured more explicit power to regulate railroad rates, review of antitrust developments from Theodore Roosevelt to Woodrow Wilson, and overviews of regulatory developments in telecommunications, airlines, railroads, and trucks.

In contrast, Severin Borenstein and Rose collaborate in a splendid, comprehensive review of airline development under regulation and deregulation. The era of regulation is examined, the many aspects of deregulation are treated, foreign developments are sketched, and the underlying economics are appraised. The regulation section reviews the familiar conclusions that monopoly rents were dissipated by forced subsidy of unprofitable routes, quality competition, and inflated salaries. The deregulation section ranges over many topics. The level and dispersion across routes and among passengers of prices and loyalty programs are treated first. Attention turns to exit, entry, and the resulting market structure. Changes in service quality are reviewed. Then comes evaluation of key issues. First, Borenstein and Rose report work suggesting that airline profits are volatile because costs are, and thus the often-raised fantasy that airline competition can be “excessive” and “ruinous” is invalid. They argue that innovation was greatest in business practices such as the hub-and-spoke route system, new price structures, and alliances among airlines. They see fears of market power as unjustified. They note the failures of governments at airport development, air-traffic control, and the efficient pricing of airport gates and landing rights.

Television / Next comes Gregory Crawford’s valuable survey of cable television regulation. Crawford consistently recognizes that both the price and quality (in terms of the number and quality of channels available) are important and the value of service improvement eludes definitive measurement. Cable television is increasingly restrained by competition from satellite providers and entry by the two main providers of local land-line telephone service. Thus, the necessity and desirability of regulation is unclear. Crawford provides a sketch of the cable industry and its rivals and then a valuable review of the evolution of regulation. Controls affected (among other things) pricing, what was carried, vertical integration into programming, and mergers.

The bulk of the chapter deals with the implications of this history. Price trends are examined and indicate a small decline from a brief period of federal imposition of price caps and a slower growth as satellite and phone-company competition increased. Subscriber growth has lessened over time and cable subscriptions declined after 1995 thanks to steady competition from first satellite and then phone suppliers. Quality has risen as more channels have become available. The qualitative improvement is difficult to measure, but rising per-subscriber prices paid to providers suggest gains. Cable companies also provide more services. Crawford attempts to find the benefits, if any, that regulation provides in terms of the price and quality of cable service. He concludes that there is no evidence of such benefits. In contrast, the data clearly show competition lowers prices.

Evidence is unclear about the importance and policy relevance of negotiations between cable companies and content providers over access fees. It is also unknown whether entry of cable companies into content provision will cause undesirable favoritism of cable-company-owned channels. In contrast, the present system of providing bundles of channels, instead of “a la carte” service, has cost-reducing effects that outweigh the presumed benefits of requiring all customers to choose only the channels they want. Crawford sees little need for new regulatory policies except those that would facilitate entry. His specifics range from the familiar one of reallocating the electromagnetic spectrum to the idea of national franchising standards, whatever that may mean.

Electricity / Frank A. Wolak provides a too lengthy, sprawling examination of supposed problems arising from efforts to create an independent, competitive electricity generation sector. Difficulties arising from implementation of such a market cause him, in effect, to fear that others’ optimism about the vigor of competition in independent generation is misplaced.

A main defect of the chapter is Wolak’s undue concentration on limited experience and particularly his excessive reliance on the California electricity crisis of the early 2000s and his market-power explanation of that crisis. Similar problems did not arise from creating independent generation in other parts of the United States. Wolak is one of the authors who piously note the defects of regulation, but then ignore those defects.

The chapter also ignores that the main restructuring of the U.S. electric power industry over the past half-century was the creation, through mergers, of larger, vertically integrated electric utilities. Such mergers were widespread but diverse. Some new mega-companies arose, most notably First Energy, which grew out of a series of mergers with contiguous firms mostly in Ohio and Pennsylvania. However, the more typical route was that already-large generators like American Electric Power and Duke Energy simply became larger. This led to other, much more successful reorganizations of regional power systems; Wolak barely notes that last point. One spectacular case involved the massive expansion of one of those systems to cover many companies and states without any major hitches.

The chapter starts with a breathless background section followed by multiple overly detailed views of the theory and practice of electricity wholesale-market design. The problem with the implementation of that market design in U.S. states that deregulated is obvious: the markets need to be as vigorously competitive as possible, and regulators failed to ensure sufficiently competitive markets. Wolak presents the traditional view that the transmission and distribution of electricity are natural monopolies whose performance can be improved by regulation and argues that regulation has a role in generation.

His too-short history section careens among many familiar subjects. A likewise too-short section tries to cover the high cost of storing electricity, the absence of time-of-use metering and pricing, the evidence that demand is responsive to price, a confused argument that short-term monopoly power exists in the electricity market but dissipates over time, that larger transmission networks facilitate competition among generators, and regulators must limit short-run power. Having made those points, he spends the rest of the chapter expanding on them in several different sections.

He starts with a bloated but still incomplete theoretical section on the comparative desirability of public ownership, unregulated private ownership, and regulated private ownership of electricity generation and delivery. His overly lengthy, disconnected treatment of the notorious defects of government ownership is particularly egregious. He presents a discussion of private monopoly that stresses simple monopoly behavior relating to a concept of residual demand. The problems with using regulation to address those issues are noted without resolution.

He then returns to the aspects of market design that he deems critical. He offers a problematic argument that a residual wholesale supplier that knows its output is critical to meeting demand can benefit from restricting output, and he turns to a model of how suppliers with long-run contract obligations can profit from a strategy that lowers spot prices so much that buying spot is the cheapest way for the suppliers to fulfill the contracts. He explains that more responsive pricing for final consumers and a larger transmission network would help increase competition. He then provides banal suggestions to regulators for generating useful market data, better designing industry structure, and supervising problem areas.

The next section is a rambling discussion of how actual restructurings failed to meet his goals. His discussion of the U.S. experience with electricity market restructuring presents conjectures about the changing roles of federal and state regulation. He notes that U.S. restructuring produced less efficiency gains than other countries’ restructurings because no inefficient publicly owned entities were divested, and inefficient new cost-recovery procedures were instead introduced. He then briefly notes a few improvements that did occur in U.S. restructuring.

Paul Joskow also contributes a paper on electricity market regulation, using it to examine the theory and practice of incentive regulation. He nicely summaries the efforts to develop regulatory approaches that recognize that regulators have imperfect knowledge about the firms being regulated and sketches the practical issues of implementation such as best design, adequacy of cost information, and appropriate benchmarks. Joskow then presents a review of experience with incentive-based pricing. The general problem of establishing a rule is outlined with warnings that the key elements of base-line cost and an appropriate adjustment factor are difficult to derive. Taking advantage of an extensive historical record, he gives a detailed, thoughtful review of the effort in Great Britain to set price caps for electricity generation and transmission. He well shows the many problems involved. A brief review of the limited information on outcomes suggests improvement resulted. He concludes with useful comments about the implications. He reiterates that implementation involves difficulties many enthusiasts ignored. He stresses problems of accounting for capital recovery but keeps tacit the basic problem that standard accounting techniques incorrectly measure economic profitability.

Telecommunications / Jerry Hausman and J. Gregory Sidak draw on the telecommunications regulation experiences in the United States, the United Kingdom, and New Zealand to sketch of relevant theory of that regulation. They conclude that rising competition from wireless and cable TV companies is superior to regulation in ensuring efficiency in land-line telecommunications. This paper is something of a mirror image of Crawford’s review of cable television, which I discussed above.

The chapter’s concern is the fixation of regulators on designing a policy for efficiently pricing the access of entrants to the lines of existing telephone companies. Regulators believed that price should encourage entrants to build competing facilities whenever the regulators believed competition would enhance efficiency. The authors’ central premise is that setting such an efficient policy for access is far beyond the capability of regulators who have botched the effort.

Their introduction starts with their basic conclusion that while the federal government allowed enough cable TV entry into telecommunications to obviate regulation, many counties did not. Some generalizations about the problems of designing a sound regulatory price structure and the shifts from rate-of-return regulation to price caps and back are sketched. The ensuing analytic portion of the chapter nicely lays out the reasons why the cost of service cannot be defined independently of market conditions and discusses how regulation is distorted by neglect of this reality.

The desirability of entry requires exhaustion of economies of scale and scope by local telephone companies. Hausman and Sidak eventually note that the rise of competition from cable TV companies suggests that such exhaustions have occurred. A further issue that is raised but cursorily treated is the high level of sunk costs for the network. In principle, a proposition from traditional single-product price theory generalizes to the multiproduct case that arises in practice: a sufficiently limited capacity level leads to excesses over variable costs that recover investment. Hausman and Sidak ignore that point and warn that regulators succumb to the temptation to set rates too low for investment recovery whatever the optimality of the past outlays.

The authors next examine the nature of and rationale for unbundling in the United States, review the U.S., UK, and New Zealand experiences with bundling and unbundling, and conclude by arguing that cable TV competition suffices to allow deregulation. The review starts with examination of U.S. policy, presents and indicates defects of the Federal Communication Commission’s rationale for compulsory access, and moves to a discussion of why experiences in the United States, UK, and New Zealand failed to support the FCC case for access.

Pharmaceuticals / Patricia Danzon and Eric Keuffel grapple with the main issues arising with pharmaceuticals: product safety, optimal patenting, price regulation, and control of promotion. They start by sketching the familiar concerns about high research and development costs with low production costs, difficulties of verifying product characteristics, and the intricacies of balance among patent protection, drugs mainly purchased through insurance, and wealth differences among countries. A good review of U.S. drug-quality regulation and brief remarks on the rest of the world follow. The treatment of the benefits and costs of U.S. policy indicates high costs and low benefits, but the authors conclude with timid proposals driven by reiteration of the standard imperfect-information excuse for intervention. The patent section starts with acceptance of the need for patent protection and a decision not to delve more deeply, provides a valuable review of how U.S. law facilitated the rise of generics, and outlines the problems of providing drugs to poor countries.

A price section tackles the rationale for layering price regulation on other controls. The authors begin by recognizing that monopolization is constrained by low concentration, ease of entry, and the ease with which an important new drug’s patent protection is undermined by imitations. Then comes a reiteration of the tired arguments that doctor ignorance and the availability of insurance lessen price sensitivity. That insurance companies negotiate for lower prices is treated as a second-best response rather than an inherent advantage of pooled purchasing. It is quickly noted that foreign countries regulate prices and U.S. Medicare drug programs rely on the price bargaining of the plan providers, but other federal drug-purchase programs impose price limits based on prices paid elsewhere in the U.S. marketplace and thus produce higher prices to nonfederal buyers. Review follows of how imitation does lower prices before patents expire and how generics quickly take over after patents expire. The many approaches to direct price controls are reviewed. A useless section complains about problems of measuring the effects of such controls. Even worse is a discussion of what the authors consider the soundest evaluation of profitability and the authors cavalierly dismiss findings of unexceptional profitability. Similarly inconclusive finds on productivity ensue.

Then the classic issue of promotional activities is surveyed. The treatment rushes through the level and composition of promotional spending, U.S. regulation, the debate over whether advertising misleads or informs, the efforts to measure the (largely positive) effects, policies in other country, whether managed-care organizations properly evaluate drugs, and the curious conclusion that the U.S. Food and Drug Administration should spend more to regulate promotion, even though there is little evidence that this is a problem.

Finance / Randall Krosner and Philip Strahan treat banking. They argue that the industry was long hobbled by regulatory measures that undesirably restrained competition, but changes arose to eliminate those restraints. The treatment begins with valuable introductory remarks that indicate that alternatives arose to overcome the restrictions on bank activity and some of those new methods may have contributed to the 2008 financial crisis.

A well-done overview of banking and the evolution of regulation follows. This starts with a terse review of the history of banking and its regulation, followed by examination of the key areas of restriction: the number of branches a given bank could own, required deposit-insurance restrictions, what activities a bank could undertake, limits on interest rates, and capital requirements. The authors note that deposit insurance was an unsatisfactory substitute for diversification arising from allowing multi-branch banks to arise.

The next section treats the consequences of financial regulation and its reform. The first key point is that many substitutes arose for banks as promoters of financing of firms. Elimination of barriers to branching produced fewer, stronger banks, but it also increased banking competition at the local level. Under the old system, the rents gained from protection from competition were an offset to the temptation for excessive risk-taking because of deposit insurance. Krosner and Strahan find it unclear whether removal of those rents had strong harmful effects. However, the consolidation clearly increased efficiency and lowered prices. They raise and dismiss fears that banks acquire inside information that they abuse. They also provide evidence of the overall beneficial effects on the rest of the economy and on macroeconomic stability. Then they argue that the political influence of small banks and insurance companies long perpetuated restrictions on branching, but the rise of automatic teller machines, money-market mutual funds, more broadly available credit information, and increasing public awareness contributed to the end of the restrictions. A short update on post-2008 developments provides conjectures on whether the financial crisis can be linked to changes in financial markets to evade regulation and in response to deregulation, and discusses the likely effects of the Dodd-Frank financial reform legislation.

The book ends with Eric Zitewitz’s particularly unsatisfactory effort to deal with securities regulation. It starts with an overblown discussion of the magnitude of fraud in the 1920s and then in the years before the Sarbanes-Oxley corporate governance legislation. That is followed by a rambling, pointless effort to show that the financial sector is large enough to be of policy relevance.

The next section unconvincingly presents the alleged market-failure justifications for intervention. The core predictably is imperfect information with consequences for the market for knowledge, including a curious variant on the hoary cream-skimming argument. The Vanguards of the industry supposedly attract the sophisticates and make the less knowledgeable more likely to pick inferior funds.

The next section is a rambling review of the history of securities regulation. It reluctantly recognizes the defects of Sarbanes-Oxley but glosses over them and makes Eliot Spitzer a hero for his state-level intervention into securities markets.

Two sections on mutual-fund fees and antitrust actions follow. Purely theoretic, familiar concerns about conflicts of interests between research and sales activities ensue. Zitewitz offers a wild conjecture, supported by only one example, that competition may entice firms to take unobservable excessive risks. The conclusions show that no clear reform path emerges. Briefly, an author who knew how to cite Stigler on the defects of regulation in general might also have considered Stigler (among many others) on why the deficiencies of securities markets do not justify the regulatory agencies that exist and are likely to emerge.