The theories of a profit-maximizing monopolist and of a regulated firm are well developed. Little attention, however, has been paid to the behavior of firms threatened with regulation. Regulation does not always appear as an unexpected event, and threatened firms may alter their behavior to reduce the probability of regulation. For example, Olmstead and Rhode [1985] tell the fascinating story of California oil companies in the 1920s. Standard Oil of California, the dominant firm and price-setter, refused to raise gasoline prices even though the real price of light crude had doubled. Similarly, during the 1979 gasoline crisis large oil companies such as Exxon and Mobil posted lower prices for gasoline and heating oil than did small companies [Erfle, Pound, and Kalt, 1981; Erfle and McMillan, 1990]. In a similar vein, Block and Feinstein [1986] find that highway construction costs are reduced after antitrust enforcement in neighboring states. These authors argue that fear of governmental regulation explains such behavior. This paper examines the politics of imposing regulation and its effect on the price chosen by a monopolist threatened with regulation. We consider a firm that is not yet regulated but that faces the risk of regulation. The probability of regulation is greater the higher the price the firm charges, and the more attentive are politicians to this issue. Once regulated, the firm remains regulated forever and earns constant profits in each subsequent period.' The firm chooses the product price to maximize the present value of its expected profits.Our emphasis differs from the literature on stochastic regulation (see Klevorick [1973] and Bawa and Sibley [1980]) which assumes that a firm already subject to regulation must charge a set price, but can decide how much capital and labor to use in production. Nor, despite its great interest, do we examine the policy that maximizes the welfare of consumers (this problem is treated by Baron and Myerson [1982]). The pricing decision we analyze *We are grateful for the comments of two anonymous referees of this Journal. 1. Recent experience in the airline, trucking, and telephone industries suggests that deregulation is a real possibility. However, the recent deregulatory movement occurred only after decades of regulation. The inertia of regulation is strong, and the agency responsible for regulation can have strong interests in continuing to regulate. It is not unreasonable, therefore, to simplify the problem by assuming that a firm once regulated continues to be so for the foreseeable future.

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Public officials often have little incentive to spend time and effort proposing policies that benefit others. When, however, some public policies generate rents to these officials, rent seeking in politics can motivate them to provide public goods. We consider the motivational effects of rent seeking on (i) policy, (ii) the the role of agenda-setting in social choice theory, (iii) the effects of graft and corruption in government, and (iv) the validity of cost-benefit analysis. Copyright 1994 Blackwell Publishers Ltd..