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Optimal Regulation of a Multiproduct Monopoly with Unknown Technological Capabilities

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  • David Sappington

Abstract

This article examines the optimal strategy for a regulator who seeks to maximize expected consumers' surplus and who faces some uncertainty about the technological capabilities of the firm being regulated. It is shown that the optimal strategy will generally induce the firm to adopt a cost structure other than the most efficient one and to produce an output vector other than the Ramsey vector of outputs, even though it is within the regulator's power to avoid such inefficient outcomes. The cross subsidies that arise under the optimal regulatory plan are also characterized.

Suggested Citation

  • 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.
  • Handle: RePEc:rje:bellje:v:14:y:1983:i:autumn:p:453-463
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    1. repec:kap:regeco:v:53:y:2018:i:2:d:10.1007_s11149-017-9348-4 is not listed on IDEAS
    2. Suren Basov, 2006. "Quality Gaps," Department of Economics - Working Papers Series 967, The University of Melbourne.
    3. Covaleski, Mark A. & Dirsmith, Mark W., 1995. "The preservation and use of public resources: Transforming the immoral into the merely factual," Accounting, Organizations and Society, Elsevier, vol. 20(2-3), pages 147-173.
    4. Haldun Evrenk & E. Zenginobuz, 2010. "Regulation through a revenue contest," Journal of Economics, Springer, vol. 99(3), pages 211-237, April.
    5. repec:eee:corfin:v:49:y:2018:i:c:p:186-203 is not listed on IDEAS
    6. Ismail SAGLAM, 2017. "Regulation versus regulated monopolization of a Cournot oligopoly with unknown cost," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(1(610), S), pages 277-290, Spring.
    7. Jensen, Sissel, 2008. "Two-part tariffs with quality degradation," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 473-489, March.
    8. Ismail SAGLAM, 2017. "Regulation versus regulated monopolization of a Cournot oligopoly with unknown cost," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(1(610), S), pages 277-290, Spring.
    9. 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.
    10. Armstrong, Mark & Vickers, John, 2016. "Multiproduct Pricing Made Simple," MPRA Paper 68717, University Library of Munich, Germany.
    11. Khalil, Fahad & Lawarree, Jacques, 2001. "Catching the agent on the wrong foot: ex post choice of monitoring," Journal of Public Economics, Elsevier, vol. 82(3), pages 327-347, December.
    12. Auriol, Emmanuelle, 1998. "Deregulation and quality," International Journal of Industrial Organization, Elsevier, vol. 16(2), pages 169-194, March.
    13. Lewis, Tracy R & Sappington, David E M, 1988. "Regulating a Monopolist with Unknown Demand," American Economic Review, American Economic Association, vol. 78(5), pages 986-998, December.
    14. Andersson, Tommy, 2004. "Essays on Nonlinear Pricing and Welfare," MPRA Paper 59446, University Library of Munich, Germany.
    15. Basov Suren, 2006. "Snobs and Quality Gaps," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 6(1), pages 1-8, March.
    16. Spiegel, Yossef, 1997. "The choice of technology and capital structure under rate regulation," International Journal of Industrial Organization, Elsevier, vol. 15(2), pages 191-216, April.
    17. Ingo Vogelsang, 2006. "Electricity Transmission Pricing and Performance-based Regulation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 97-126.
    18. Bertsch, Joachim & Hagspiel, Simeon, 2015. "Regulation of non-marketed outputs and substitutable inputs," EWI Working Papers 2015-6, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    19. Jean-Charles Rochet & Guillaume Roger, 2016. "Risky utilities," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(1), pages 361-382, June.

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