Legal Cartel Theory

The regulation of potentially competitive industries has produced the legal cartel theory of regulation. In place of socially minded officials forcing regulation on natural monopolies to protect consumers, holders of this view see practical politicians as supplying regulation to local, regional, and national firms that fear the impact of competition on their profits or even on their long-term survival. These firms desire regulation because it yields a legal monopoly that can guarantee a profit. Specifically, the regulatory commission performs such functions as blocking entry (for example, in local telephone service), or, where there are several firms, the commission divides up the market much like an illegal cartel (for example, before airline deregulation, the federal government assigned routes to specific airlines). The commission may also restrict potential competition by enlarging the "cartel."

Although private cartels are illegal, unstable, and often break down, the special attraction of a government-sponsored cartel under the guise of regulation is that it endures. The legal cartel theory of regulation suggests that regulation results from the rent-seeking activities of private firms and the desire of politicians to be responsive.

Occupational licensing is a labour-market application of the legal cartel theory. Certain occupational group—barbers, dentists, hairstylists, interior designers, dietitians, lawyers—demand stringent licensing on the grounds that it protects the public from charlatans and quacks, but skeptics say the real reason may be to limit entry into the occupational group so that practitioners can receive monopoly incomes. It is not surprising to these skeptics that a recent study found that, other things equal, dental fees were about 15 percent higher and dentist income 10 percent higher in areas with the most restrictive licensing laws. The quality of dentistry apparently was not affected.1

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