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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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David Sappington, 1983. "Optimal Regulation of a Multiproduct Monopoly with Unknown Technological Capabilities," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 453-463, Autumn.
- Roger B. Myerson, 1977.
"Incentive Compatability and the Bargaining Problem,"
284, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
- Ingo Vogelsang & Jorg Finsinger, 1979. "A Regulatory Adjustment Process for Optimal Pricing by Multiproduct Monopoly Firms," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 157-171, Spring.
- George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
- David P. Baron & David Besanko, 1984. "Regulation, Asymmetric Information, and Auditing," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 447-470, Winter.
- Jean Tirole & Jean-Jaques Laffont, 1985.
"Using Cost Observation to Regulate Firms,"
368, Massachusetts Institute of Technology (MIT), Department of Economics.
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