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Regulating a Monopolist with Unknown Demand

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  • Lewis, Tracy R
  • Sappington, David E M

Abstract

The authors analyze the optimal regulatory policy when the firm has better information about demand than the regulator from the outset of their relationship. The firm's cost structure is common knowledge, but monitoring of output is prohibitively costly. The authors find that, when marginal production costs increase with output, the firm command s no rents from its private information and the efficient price is established for each realization of demand. In contrast, with declining marginal costs, the same price is established by the regulator for all demand realizations and the firm's rents can be substantial. Overall, major qualitative differences in the optimal regulatory policy arise when the firm's private information concerns demand rather than costs. Copyright 1988 by American Economic Association.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 78 (1988)
Issue (Month): 5 (December)
Pages: 986-98

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Handle: RePEc:aea:aecrev:v:78:y:1988:i:5:p:986-98

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Cited by:
  1. Ayako Suzuki, 2008. "Yardstick Competition to Elicit Private Information: An Empirical Analysis of the Japanese Gas Distribution Industry," ISER Discussion Paper 0709, Institute of Social and Economic Research, Osaka University.
  2. Mahenc, Philippe, 2008. "Signaling the environmental performance of polluting products to green consumers," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 59-68, January.
  3. James E. Prieger & Nicholas J. Sanders, 2011. "Verifiable and Non-Verifiable Anonymous Mechanisms for Regulating a Polluting Monopolist," Discussion Papers 10-034, Stanford Institute for Economic Policy Research.
  4. Cowan, Simon, 2004. "Optimal risk allocation for regulated monopolies and consumers," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 285-303, January.
  5. Osmundsen, Petter, 2002. "Regulation of common property resources under private information about resource externalities," Resource and Energy Economics, Elsevier, vol. 24(4), pages 349-366, November.
  6. Kalu, Timothy Ch. U., 1995. "A uniform profit margin policy and its effects on mineral producing firms The case of the oil industry," Resources Policy, Elsevier, vol. 21(1), pages 61-72, March.
  7. Jørgensen, Finn & Pedersen, Pål Andreas, 2004. "Travel distance and optimal transport policy," Transportation Research Part B: Methodological, Elsevier, vol. 38(5), pages 415-430, June.
  8. Norsworthy, J. R. & Tsai, Diana H., 1999. "The role of service quality and capital technology in telecommunication regulation," Information Economics and Policy, Elsevier, vol. 11(2), pages 127-145, July.
  9. Armstrong, Mark, 1999. "Optimal Regulation with Unknown Demand and Cost Functions," Journal of Economic Theory, Elsevier, vol. 84(2), pages 196-215, February.
  10. Wang, Gyu Ho, 2000. "Regulating an oligopoly with unknown costs," International Journal of Industrial Organization, Elsevier, vol. 18(5), pages 813-825, July.
  11. Berry, S. Keith, 2000. "Stranded costs, access charges, and Ramsey pricing in the U.S. electric utility industry," The Quarterly Review of Economics and Finance, Elsevier, vol. 40(4), pages 503-517.
  12. Shen, Yuelin & Willems, Sean P., 2012. "Coordinating a channel with asymmetric cost information and the manufacturer's optimality," International Journal of Production Economics, Elsevier, vol. 135(1), pages 125-135.

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