Regulating a Monopolist with Unknown Demand
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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Volume (Year): 78 (1988)
Issue (Month): 5 (December)
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