Regulatory Inspection Regimes and Oligopoly Competition
33 Pages Posted: 29 Feb 2016
Date Written: December 16, 2015
Abstract
To enforce compliance with product safety standards, regulatory agencies employ supervisors to conduct inspections and impose fines on firms that violate these standards. In most industries, the designated regulators choose between various inspection regimes, such as announced or unannounced surprise inspections. We conduct a positive analysis of the impact of these regimes on firms' safety choices in a multiple stage oligopoly game with endogenous quality and quantity competition. In equilibrium, whether surprise inspections achieve a higher level of safety depends on the number of firms, the cost of safety provision and demand. Furthermore, the impact on safety of increasing the fine, the supervisor's wage or the probability of inspections may be non-monotonic and also depends on market size and structure. Finally, we show that in some cases, neither unannounced, nor announced inspections can attain the socially optimal safety level. However in such cases, unannounced inspections minimize the distortion from socially optimal safety.
Keywords: Detection avoidance, Unannounced inspections, Announced inspections, Product safety, Optimal fine
JEL Classification: L13, L15, K42
Suggested Citation: Suggested Citation