Who decides to regulate? Lobbying activity in the US cellular industry

How does the choice to regulate a market take place? And how does regulation influence market outcome? We argue that to explicitly model the simultaneity between these two issues makes a qualitative difference in the analysis of the role of regulation, and empirically test our model in the U.S. mobile telecommunications industry. We find support for our approach: Regulatory choice should be considered endogenous. We show that, correcting for the simultaneity, regulation’s overall effect should have been a reduction of cellular tariffs. However, this result is not highly significant. Our explanation for this finding is that firms’ lobbying activity on regulatory choice has been successful: some firms were able to avoid regulation in those market where it would have significantly reduced prices. We argue that this is the real source of the found simultaneity. Moreover, we provide evidence that the probability of regulation was higher, other things equal, when the regulator was appointed by politicians, when the State’s Governor came from the democratic party, and when the government was politically stable.