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Optimal Regulation of a Multiproduct Monopoly with Unknown Technological Capabilities

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  • David Sappington

Abstract

This article examines the optimal strategy for a regulator who seeks to maximize expected consumers' surplus and who faces some uncertainty about the technological capabilities of the firm being regulated. It is shown that the optimal strategy will generally induce the firm to adopt a cost structure other than the most efficient one and to produce an output vector other than the Ramsey vector of outputs, even though it is within the regulator's power to avoid such inefficient outcomes. The cross subsidies that arise under the optimal regulatory plan are also characterized.

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Bibliographic Info

Article provided by The RAND Corporation in its journal Bell Journal of Economics.

Volume (Year): 14 (1983)
Issue (Month): 2 (Autumn)
Pages: 453-463

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Handle: RePEc:rje:bellje:v:14:y:1983:i:autumn:p:453-463

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Cited by:
  1. Fahad Khalil & Jacques Lawarree, 2000. "CATCHING THE AGENT ON THE WRONG FOOT: ex post choice of monitoring," Discussion Papers in Economics at the University of Washington 0006, Department of Economics at the University of Washington.
  2. Ingo Vogelsang, 2006. "Electricity Transmission Pricing and Performance-based Regulation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 97-126.
  3. Haldun Evrenk & E. Zenginobuz, 2010. "Regulation through a revenue contest," Journal of Economics, Springer, vol. 99(3), pages 211-237, April.
  4. Khalil, Fahad & Lawarree, Jacques, 2001. "Catching the agent on the wrong foot: ex post choice of monitoring," Journal of Public Economics, Elsevier, vol. 82(3), pages 327-347, December.
  5. Suren Basov, 2006. "Quality Gaps," Department of Economics - Working Papers Series 967, The University of Melbourne.
  6. Suren Basov, 2005. "Snobs and Quality Gaps," Department of Economics - Working Papers Series 944, The University of Melbourne.
  7. Jensen, Sissel, 2008. "Two-part tariffs with quality degradation," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 473-489, March.
  8. Auriol, Emmanuelle, 1998. "Deregulation and quality," International Journal of Industrial Organization, Elsevier, vol. 16(2), pages 169-194, March.
  9. Covaleski, Mark A. & Dirsmith, Mark W., 1995. "The preservation and use of public resources: Transforming the immoral into the merely factual," Accounting, Organizations and Society, Elsevier, vol. 20(2-3), pages 147-173.
  10. 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.

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