Regulation of Duopoly: Managed Competition vs. Regulated Monopolies
AbstractThis paper discusses the regulation of oligopolistic differentiated product industries. The regulator can control the prices, and impose quantity restrictions, but cannot control effectively the quality choices of the firms. We inquire about the optimal choice of regulatory regime--whether and under what conditions managed competition or segmentation of the market between regulated monopolies achieves better results. In the spatial duopoly model analyzed here, unhindered competition will generally result in an inefficient allocation. When the regulator knows the technologies, optimal managed competition results in distortions of the quality choice, but an optimal regulated monopolies regime acheives the first best outcome. When the regulator is uncertain about the technologies neither of these methods will yield the first best outcome. The regulated monopolies regime still tends to produce better quality choices, but managed competition tends to be more effective at extracting rents from the firms. The overall comparison depends on some finer details of the environment.
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Bibliographic InfoPaper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1116.
Date of creation: Dec 1994
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Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014
Web page: http://www.kellogg.northwestern.edu/research/math/
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Other versions of this item:
- Asher Wolinsky, 1997. "Regulation of Duopoly: Managed Competition vs Regulated Monopolies," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 821-847, December.
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