Capture Theory of Regulation

The capture theory of regulation was first developed by the economist and 1982 Nobel laureate George Stigler. Regulation of industry is generally thought to be a government function designed to protect consumers by setting safety standards and ensuring good practice in production processes and sometimes through price regulation. Stigler and the public choice school suggest that regulators are often “captured” by the firms and industry they regulate and produce regulatory practices that are in the interests of the industry rather than the consumer. Although consumers want safe products and low cost, firms also have an interest in regulation, first to keep out competitors and second to build obsolescence into their products. If firms within an industry are protected from competition from new entrants, then they can charge higher prices. Firms have an incentive to lobby regulators to write regulations that will discourage new entrants into the industry, thus allowing established firms to act as a cartel. One way of discouraging new entrants is to have complex regulations. Furthermore, if the safety standards of products, such as gas boilers or cars, are continually being upgraded then the industry builds obsolescence into its products, ensuring a continual demand for new versions.

Sam Peltzman's model for capture theory reflects the competition between firms and consumers for the attention of politicians and state regulators. Consumers have voting power, and can demand the type of regulations they desire through the ballot box. Firms within an industry have a concentrated and high financial stake. Thus, they are prepared to spend large amounts of money lobbying regulators and politicians. Firms are also a source of expertise for the bureaucrats. Politicians will support consumer demands to the extent of their vote power, but financial contributions from industry to politicians can also buy vote power. Furthermore, consumer interests are diffuse—they [Page 88]make many demands on politicians—whereas the industry interests are concentrated. Thus, consumers face a greater collective action problem than do producers. This can lead to industry capture.

Examples of capture found in the literature include the commercial airline industry in the United States. The Civil Aeronautics Board controlled price competition but allowed airlines to compete on non-price frills such as in-flight entertainment. After deregulation in the 1970s, the Federal Aviation Administration was also accused of aiding airlines rather than consumers. The U.S. Food and Drug Administration has been accused of acting in the interests of pharmaceutical, agricultural, and health industries at the expense of consumers. The European Union is also accused of acting in the interests of industry rather than consumers.

There has been a great deal of headline deregulation, which seems to undermine capture theory. However, bureaucracies do continue to regulate in quiet and unspectacular ways. It is difficult to judge how far these regulations really work in the interests of consumers and how far in those of the industries regulated. However, given the greater bargaining power of industry, the suspicion will always be that regulations exist for industry rather than consumers.