We have already sketched the main explanation for the fact that an industry with power to obtain governmental favors usually does not use this power to get money: unless the list of beneficiaries can be limited by an acceptable device, whatever amount of subsidies the industry can obtain will be dissipated among a growing number of rivals. The airlines quickly moved away from competitive bidding for air mail contracts to avoid this problem.2 On the other hand, the premier universities have not devised a method of excluding other claimants for research funds, and in the long run they will receive much-reduced shares of federal research monies. The second major public resource commonly sought by an in- dustry is control over entry by new rivals. There is considerable, not to say excessive, discussion in economic literature of the rise of peculiar price policies (limit prices), vertical integration, and similar devices to retard the rate of entry of new firms into oligopolistic in- dustries. Such devices are vastly less efficacious (economical) than the certificate of convenience and necessity (which includes, of course, the import and production quotas of the oil and tobacco industries). The diligence with which the power of control over entry will be exercised by a regulatory body is already well known. The Civil Aeronautics Board has not allowed a single new trunk line to be launched since it was created in 1938. The power to insure new banks has been used by the Federal Deposit Insurance Corporation to reduce the rate of entry into commercial banking by 60 percent.3 The interstate motor carrier history is in some respects even more striking, because no even ostensibly respectable case for restriction on entry can be developed on grounds of scale economies (which are in turn adduced to limit entry for safety or economy of operation).
The number of federally licensed common carriers is shown in Figure 1: the immense growth of the freight hauled by trucking common carriers has been associated with a steady secular decline of numbers of such carriers. The number of applications for new certificates has been in excess of 5000 annually in recent years: a rigorous proof that hope springs eternal in an aspiring trucker's breast. We propose the general hypothesis: every industry or occupation that has enough political power to utilize the state will seek to con- trol entry. In addition, the regulatory policy will often be so fashioned as to retard the rate of growth of new firms. For example, no new savings and loan company may pay a dividend rate higher than that prevailing in the community in its endeavors to attract deposits.4 The power to limit selling expenses of mutual funds, which is soon to be conferred upon the Securities and Exchange Commission, will serve to limit the growth of small mutual funds and hence reduce the sales costs of large funds. One variant of the control of entry is the protective tariff (and the corresponding barriers which have been raised to interstate move- ments of goods and people). The benefits of protection to an industry, one might think, will usually be dissipated by the entry of new do- mestic producers, and the question naturally arises: Why does the industry not also seek domestic entry controls? In a few industries 2 See [7], pp. 60 ff. ISee [10}. 4The Federal Home Loan Bank Board is the regulatory body. It also controls the amount of advertising and other areas of competition. THEORY OF REGULATION / 5
FIGURE 1 CERTIFICATES FOR INTERSTATE MOTOR CARRIERS 200 0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~00 0j 150 < '_CUM ULATIV E O APPLICATIONS 0 z 15 10 C E : 9 80 SOURCE: TABLE 5 ~ ~ LICNSE (petroleum) the domestic controls have been obtained, but not in most. The tariff will be effective if there is a specialized domestic resource necessary to the industry; oil-producing lands is an example. Even if an industry has only durable specialized resources, it will gain if its contraction is slowed by a tariff. A third general set of powers of the state which will be sought by the industry are those which affect substitutes and complements. Crudely put, the butter producers wish to suppress margarine and encourage the production of bread. The airline industry actively sup- ports the federal subsidies to airports; the building trade unions have opposed labor-saving materials through building codes. We shall examine shortly a specific case of inter-industry competition in transportation. The fourth class of public policies sought by an industry is di- rected to price-fixing. Even the industry that has achieved entry control will often want price controls administered by a body with coercive powers. If the number of firms in the regulated industry is even moderately large, price discrimination will be difficult to main- tain in the absence of public support. The prohibition of interest on demand deposits, which is probably effective in preventing interest payments to most non-business depositors, is a case in point. Where there are no diseconomies of large scale for the individual firm (e.g., a motor trucking firm can add trucks under a given license as com- mon carrier), price control is essential to achieve more than competi- tive rates of return. O Limitations upon political benefits. These various political boons are not obtained by the industry in a pure profit-maximizing form. The political process erects certain limitations upon the exercise of cartel policies by an industry. These limitations are of three sorts.
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