An Effect of Interest Groups on Regulation

Abstract

The activities of interest groups have grown remarkably rapidly in the political system. The aims of this paper are to analyse an effect of intererest groups on economic policy. Especially we focus on price-entry regulation. In order to analyse this problem, we use a model of competition among interest groups that was developed by Becker (1983, 1985) and Kishimoto (1987) .
In our model, regulated price is affected by the political pressure of consumer group and producer group. This relation is called “political influence funtion”. Both groups know “political influence function” perfectly. Each group chooses its expenditure on political pressure to maximize its political benefit that depends on regulated price. The interaction between groups is modeled as a Cournot-Nash noncooperative game.
Our main conclusions are as follows. Firstly, political equilibrium will not result in the monopoly price. This conclusion is right even if consumer cannot organize a pressure group since the expenditure to control free riding is very high. Secondly, political equilibrium will not result in the competition price except one extreme case. That is, the competition price is set in the political process if and only if two groups are equal in the political effectiveness. Generally regulated price depends on the relative political effectiveness between two groups.