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Monopoly Pricingand Regulatory Oversight

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  • Jeffrey S. Banks

Abstract

This paper analyzes the interaction between a regulator and monopolist in the determination of the price for the monopolist's product, where only the monoplast knows ex ante its true marginal cost of production. The regulator observes the market price proposed by the monopolist and decides whether to hold a rate hearing, where suck a hearing is a costly means of verifying the monopolist's marginal cost. Subsequent to a rate hearing, the regulator can impose a market price for the monopolist's product; in the absence of a rate hearing, the market price is set equal to the monopolist's proposed price. Equilibrium behavior by the monopolist and regulator is characterized, and the degree of regulatory “activism,” as defined by the probability a rate hearing is held, is seen to vary ex post with the monopolist's true marginal cost.

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  • Jeffrey S. Banks, 1992. "Monopoly Pricingand Regulatory Oversight," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(1), pages 203-233, March.
    • Handle: RePEc:bla:jemstr:v:1:y:1992:i:1:p:203-233
    DOI: 10.1111/j.1430-9134.1992.00203.x
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    1. Baron, David P., 1989. "Design of regulatory mechanisms and institutions," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 24, pages 1347-1447, Elsevier.
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    Cited by:

    1. Spiegel, Yossef, 1997. "The choice of technology and capital structure under rate regulation," International Journal of Industrial Organization, Elsevier, vol. 15(2), pages 191-216, April.
    2. Gianmaria Martini & Cinzia Rovesti, 2004. "Antitrust policy and price collusion. Public agencies vs delegation," Recherches économiques de Louvain, De Boeck Université, vol. 70(2), pages 127-151.
    3. Helmut Bester & Matthias Lang & Jianpei Li, 2021. "Signaling versus Auditing," RAND Journal of Economics, RAND Corporation, vol. 52(4), pages 859-883, December.
    4. Mehmet Ekmekci & Nenad Kos, 2020. "Signaling Covertly Acquired Information," Working Papers 658, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    5. Bester, Helmut & Lang, Matthias & Li, Jianpei, 2018. "Signaling versus costly information acquisition," Discussion Papers 2018/11, Free University Berlin, School of Business & Economics.

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