Welfare and Product Testing by a Regulated Monopolist
This paper studies a monopoly firm with the ability to conduct costly premarket testing of its product in order to predict how safe this product is to consume. While there are private incentives to test, the amount of testing effort supplied by a monopolist need not be optimal. In a model which allows for an imperfect system of liability, the authors characterize and compare the allocations of testing effort and output at the full social optimum, the pure monopoly solution, and the second-best regulated optimum wherein the regulator chooses testing effort and the monopolist chooses output and price. Copyright 1991 by Kluwer Academic Publishers
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