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Regulating a Multiproduct Monopolist with Unknown Demand: Cross-Subsidization and Countervailing Incentives

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  • Iñaki Aguirre
  • Arantza Beitia

Abstract

This paper studies the regulation of a multiproduct monopolist that has private information about demand conditions. In particular, we consider the regulation of a two-product monopolist with interdependent demands when it has better information concerning the demand of one product than the regulator and public funds are costly. We show that the optimal regulation policy in this case crucially depends on whether goods are substitutes or complements. Cross-subsidization arises with demand complementarities, making it likely that countervailing incentives characterize the optimal contract.

Suggested Citation

  • Iñaki Aguirre & Arantza Beitia, 2008. "Regulating a Multiproduct Monopolist with Unknown Demand: Cross-Subsidization and Countervailing Incentives," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(4), pages 652-675, December.
  • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200812)164:4_652:rammwu_2.0.tx_2-7
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    References listed on IDEAS

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    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. Armstrong, Mark, 1999. "Optimal Regulation with Unknown Demand and Cost Functions," Journal of Economic Theory, Elsevier, vol. 84(2), pages 196-215, February.
    3. R. Schmalensee & R. Willig (ed.), 1989. "Handbook of Industrial Organization," Handbook of Industrial Organization, Elsevier, edition 1, volume 2, number 2.
    4. Takanori Adachi, 2005. "Third-Degree Price Discrimination, Consumption Externalities and Social Welfare," Economica, London School of Economics and Political Science, vol. 72(285), pages 171-178, February.
    5. Armstrong, Mark & Rochet, Jean-Charles, 1999. "Multi-dimensional screening:: A user's guide," European Economic Review, Elsevier, vol. 43(4-6), pages 959-979, April.
    6. R. Schmalensee & R. Willig (ed.), 1989. "Handbook of Industrial Organization," Handbook of Industrial Organization, Elsevier, edition 1, volume 1, number 1.
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    Cited by:

    1. Aguirre, Iñaki & Beitia, Arantza, 2017. "Modelling countervailing incentives in adverse selection models: A synthesis," Economic Modelling, Elsevier, vol. 62(C), pages 82-89.
    2. Daniel Danau & Annalisa Vinella, 2017. "Contractual design in agency problems with non-monotonic cost and correlated information," SERIES 02-2017, Dipartimento di Economia e Finanza - Università degli Studi di Bari "Aldo Moro", revised Mar 2017.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General

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