Network Regulation Using an Agent

This paper introduces a new regulatory concept: the independent profit-maximising regulatory agent, as a possible model for regulating network industries where complex demand interdependencies, in particular demand complementarities, make traditional methods of regulation difficult. We derive a simple theoretical network model with differentiated demands and explore alternative competitive and regulatory strategies. We show that the employment of an independent profit-maximising agent may offer a partial solution to the problem of network regulation, yielding outcomes which involve all parties pursuing their own interests yet are relatively desirable to both firms and society.