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Robust Monopoly Regulation

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  • Yingni Guo
  • Eran Shmaya

Abstract

We study the regulation of a monopolistic firm using a robust-design approach. We solve for the policy that minimizes the regulator's worst-case regret, where the regret is the difference between his complete-information payoff minus his realized payoff. When the regulator's payoff is consumers' surplus, it is optimal to impose a price cap. The optimal cap balances the benefit from more surplus for consumers and the loss from underproduction. When his payoff is consumers' surplus plus the firm's profit, he offers a piece-rate subsidy in order to mitigate underproduction, but caps the total subsidy so as not to incentivize severe overproduction.

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  • Yingni Guo & Eran Shmaya, 2019. "Robust Monopoly Regulation," Papers 1910.04260, arXiv.org.
    • Handle: RePEc:arx:papers:1910.04260
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    File URL: http://arxiv.org/pdf/1910.04260
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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. Renou, Ludovic & Schlag, Karl H., 2011. "Implementation in minimax regret equilibrium," Games and Economic Behavior, Elsevier, vol. 71(2), pages 527-533, March.
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    Cited by:

    1. Varawala, Lamia & Hesamzadeh, Mohammad Reza & Dán, György & Bunn, Derek & Rosellón, Juan, 2023. "A pricing mechanism to jointly mitigate market power and environmental externalities in electricity markets," Energy Economics, Elsevier, vol. 121(C).
    2. Wanchang Zhang, 2022. "Auctioning Multiple Goods without Priors," Papers 2204.13726, arXiv.org.
    3. Yeon-Koo Che & Weijie Zhong, 2021. "Robustly Optimal Mechanisms for Selling Multiple Goods," Papers 2105.02828, arXiv.org, revised Aug 2022.
    4. Bernhard Kasberger, 2022. "An Equilibrium Model of the First-Price Auction with Strategic Uncertainty: Theory and Empirics," Papers 2202.07517, arXiv.org, revised Mar 2022.
    5. Kai Hao Yang & Alexander K. Zentefis, 2023. "Regulating Oligopolistic Competition," Papers 2302.03185, arXiv.org, revised Feb 2024.
    6. Bernhard Kasberger & Kyle Woodward, 2021. "Bidding in Multi-Unit Auctions under Limited Information," Papers 2112.11320, arXiv.org, revised Apr 2023.
    7. Babichenko, Yakov & Talgam-Cohen, Inbal & Xu, Haifeng & Zabarnyi, Konstantin, 2022. "Regret-minimizing Bayesian persuasion," Games and Economic Behavior, Elsevier, vol. 136(C), pages 226-248.
    8. Rumen Kostadinov, 2023. "Worst-case Regret in Ambiguous Dynamic Games," Department of Economics Working Papers 2022-08, McMaster University.
    9. Jose Higueras, 2023. "Robust Regulation of Firms' Access to Consumer Data," Papers 2305.05822, arXiv.org, revised Mar 2024.

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