Economic Report of the President

pricing—setting prices below cost in order to drive out competitors.To succeed, a predator must outlast its rivals and barriers must existto prevent the entry of new competitors once the predator raisesprices. Regulation to prevent firms from charging excessively lowprices is intended to prevent such predatory practices and hence thehigher monopolistic prices that would prevail once the predator haseliminated its competitors. No consensus exists among economiststhat such predatory tactics are effective. Indeed, many economists believethat apparently "predatory" behavior, if ever successful, is amanifestation of cost advantages or an enhanced ability to bear risk.A fourth interpretation concerns the alleged tendency of certaincompetitive markets to produce goods or services of inadequate quality,safety, or reliability if consumers are imperfectly informed aboutthose characteristics. For example, it has been argued that undercompetitive pressure banks might choose excessively risky investmentsin order to offer their customers high rates of interest on deposits.Similarly, some have claimed that airlines may skimp on safetyin a highly competitive market. Even if such claims were true, it doesnot follow that restricting competition will necessarily improve qualityor safety. Moreover, there are more direct ways of addressingthese potential market defects, such as Federal Aviation Administrationairplane safety inspections and Federal Deposit Insurance Corporationguarantees.PROBLEMS OF ECONOMIC REGULATIONMost economists agree that the regulation of price and entry inmarkets that would otherwise be competitive is inefficient. Regulationof transportation, for example, has generally resulted in higherprices, higher production costs, and slower technological growth.Regulation of oil and gas prices has occasionally kept prices too low,causing shortages and inefficient choices among competing fuels.Deregulation usually leads to a reduction in cost to the marginaluser, whether the discarded regulations established maximum orminimum prices. A price kept below the market price by regulationhas the effect of creating a system of nonprice rationing in which excludedconsumers are forced to pay higher prices for substitutes. Theelimination of maximum price ceilings may lead to higher averageprices but lower prices to the marginal consumer. Exceptions to thisconclusion are where natural monopoly conditions exist or whereregulations lead to some cross-subsidy among consumers.In some cases, price regulation leads to an excessively high level ofsome service characteristic, because firms are prevented from competingon price. Because of price regulation of airlines by the Civil100