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Undominated monopoly regulation

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  • Mishra, Debasis
  • Patil, Sanket

Abstract

We study undominated mechanisms with transfers for regulating a monopolist who privately observes the marginal cost of production. A mechanism is undominated if no other mechanism gives the regulator a strictly higher payoff at some marginal cost of the monopolist without lowering the regulator's payoff at other costs. We show that an undominated mechanism has a quantity floor: whenever the monopolist is allowed to operate, it produces above a threshold quantity. Moreover, the regulator's operation decision is stochastic only if the monopolist produces at the quantity floor. We provide a near-complete characterization of the set of undominated mechanisms and use it to (a) derive a max-min optimal regulatory mechanism, (b) provide a foundation for deterministic mechanisms, and (c) show that the efficient mechanism is dominated.

Suggested Citation

  • Mishra, Debasis & Patil, Sanket, 2025. "Undominated monopoly regulation," Journal of Economic Theory, Elsevier, vol. 228(C).
    • Handle: RePEc:eee:jetheo:v:228:y:2025:i:c:s002205312500095x
    DOI: 10.1016/j.jet.2025.106049
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    JEL classification:

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

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