IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/64366.html
   My bibliography  Save this paper

Regulating a Manager-Controlled Monopoly with Unknown Costs

Author

Listed:
  • Saglam, Ismail

Abstract

We study the regulation of a manager-controlled monopoly with unknown costs, borrowing from the earlier work of Baron and Myerson (BM)(1982), where the monopoly is controlled by the owner. Our regulatory environment involves the case where the regulator can tax the owner as well as the case where she cannot. We show that the optimal price schedule in our model generally lies below the one in the BM model. In addition, if the compensation parameter is sufficiently small, the optimal price can be as low as the marginal cost, provided that the regulator cannot tax the owner of the monopoly. We also examine how the size of the managerial compensation affects the welfare of the owner of the monopoly as well as the social welfare. Moreover, we show that in settings where the owner of a manager-controlled monopoly cannot be taxed, the owner prefers to separate management from ownership, provided that the marginal cost of production is sufficiently large. However, the owner always prefers to manage the monopoly herself when the marginal cost of production is sufficiently small.

Suggested Citation

  • Saglam, Ismail, 2015. "Regulating a Manager-Controlled Monopoly with Unknown Costs," MPRA Paper 64366, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:64366
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/64366/1/MPRA_paper_64366.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
    2. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
    3. Harris Milton & Townsend, Robert M, 1981. "Resource Allocation under Asymmetric Information," Econometrica, Econometric Society, vol. 49(1), pages 33-64, January.
    4. Baron, David P & Myerson, Roger B, 1982. "Regulating a Monopolist with Unknown Costs," Econometrica, Econometric Society, vol. 50(4), pages 911-930, July.
    5. Baron, David P. & Besanko, David, 1984. "Regulation and information in a continuing relationship," Information Economics and Policy, Elsevier, vol. 1(3), pages 267-302.
    6. Loeb, Martin & Magat, Wesley A, 1979. "A Decentralized Method for Utility Regulation," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 399-404, October.
    7. Prusa, Thomas J., 1990. "An incentive compatible approach to the transfer pricing problem," Journal of International Economics, Elsevier, vol. 28(1-2), pages 155-172, February.
    8. Steven D. Sklivas, 1987. "The Strategic Choice of Managerial Incentives," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 452-458, Autumn.
    9. Roland Strausz, 2011. "Regulatory Risk Under Optimal Monopoly Regulation," Economic Journal, Royal Economic Society, vol. 121(553), pages 740-762, June.
    10. Partha Dasgupta & Peter Hammond & Eric Maskin, 1979. "The Implementation of Social Choice Rules: Some General Results on Incentive Compatibility," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 46(2), pages 185-216.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. B. Caillaud & R. Guesnerie & P. Rey & J. Tirole, 1988. "Government Intervention in Production and Incentives Theory: A Review of Recent Contributions," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 1-26, Spring.
    2. Saglam, Ismail, 2014. "Research and Development of an Optimally Regulated Monopolist with Unknown Costs," MPRA Paper 60245, University Library of Munich, Germany.
    3. Raffaele Fiocco & Roland Strausz, 2015. "Consumer Standards as a Strategic Device to Mitigate Ratchet Effects in Dynamic Regulation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(3), pages 550-569, September.
    4. Victor V. Claar, 1998. "An Incentive-Compatibility Approach To the Problem of Monitoring a Bureau," Public Finance Review, , vol. 26(6), pages 599-610, November.
    5. Ismail SAGLAM, 2017. "Regulation versus regulated monopolization of a Cournot oligopoly with unknown cost," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(1(610), S), pages 277-290, Spring.
    6. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 27, pages 1557-1700, Elsevier.
    7. Ismail Saglam, 2016. "On the Pareto Efficiency of a Socially Optimal Mechanism for Monopoly Regulation," IPEK Working Papers 1601, Ipek University, Department of Economics, revised May 2016.
    8. Pascal Courty & Li Hao, 2000. "Sequential Screening," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(4), pages 697-717.
    9. Acemoglu, Daron & Golosov, Mikhail & Tsyvinski, Aleh, 2008. "Markets versus governments," Journal of Monetary Economics, Elsevier, vol. 55(1), pages 159-189, January.
    10. Ismail Saglam, 2022. "Self-regulation under asymmetric cost information," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 49(2), pages 335-368, June.
    11. Corchón, Luis C., 2008. "The theory of implementation : what did we learn?," UC3M Working papers. Economics we081207, Universidad Carlos III de Madrid. Departamento de Economía.
    12. Aguirre, Iñaki & Beitia, Arantza, 2017. "Modelling countervailing incentives in adverse selection models: A synthesis," Economic Modelling, Elsevier, vol. 62(C), pages 82-89.
    13. Ismail Saglam, 2022. "Pareto gains of predonation in monopoly regulation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(4), pages 817-854, August.
    14. Ismail Saglam, 2017. "Monopoly Regulation Under Relaxed Pareto Efficiency," Studies in Microeconomics, , vol. 5(2), pages 162-176, December.
    15. Sumit K. Majumdar, 2010. "Incentive Compatible Mechanism Design And Firm Growth: Experiences From Telecommunications Sector Regulation," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 81(3), pages 357-387, September.
    16. Bergemann, Dirk & Pavan, Alessandro, 2015. "Introduction to Symposium on Dynamic Contracts and Mechanism Design," Journal of Economic Theory, Elsevier, vol. 159(PB), pages 679-701.
    17. Ismail Saglam, 2022. "Bridging bargaining theory with the regulation of a natural monopoly," Review of Economic Design, Springer;Society for Economic Design, vol. 26(3), pages 307-344, September.
    18. Saglam, Ismail, 2021. "Pareto Improvement in Monopoly Regulation Using Pre-Donation," MPRA Paper 109741, University Library of Munich, Germany.
    19. Ismail SAGLAM, 2017. "Regulation versus regulated monopolization of a Cournot oligopoly with unknown cost," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(1(610), S), pages 277-290, Spring.
    20. Arve, Malin & Zwart, Gijsbert, 2023. "Optimal procurement and investment in new technologies under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 147(C).

    More about this item

    Keywords

    Monopoly; Regulation; Firm Ownership; Firm Control;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:64366. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.