Regulatory Inspection Regimes and Oligopoly Competition

33 Pages Posted: 29 Feb 2016

See all articles by Emmanuel Dechenaux

Emmanuel Dechenaux

Kent State University - Department of Economics

Andrew Samuel

Loyola University Maryland

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

Dechenaux, Emmanuel and Samuel, Andrew, Regulatory Inspection Regimes and Oligopoly Competition (December 16, 2015). Available at SSRN: https://ssrn.com/abstract=2739133 or http://dx.doi.org/10.2139/ssrn.2739133

Emmanuel Dechenaux (Contact Author)

Kent State University - Department of Economics ( email )

Kent, OH 44242
United States

Andrew Samuel

Loyola University Maryland ( email )

4501 North Charles Street
Baltimore, MD 21210-2699
United States

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