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Self-Regulation Under Asymmetric Cost Information

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  • Saglam, Ismail

Abstract

In this paper, we study how a monopolistic firm with unknown costs may behave under the threat of regulation. To this aim, we integrate the self-regulation model of Glazer and McMillan (1992) with the optimal regulatory mechanism devised by Baron and Myerson (1982) for the case of asymmetric information. Simulating the equilibrium outcome of our integrated model for a wide range of parameter values, we show that the firm threatened with regulation always constrains its price; moreover, it does so more stringently if it is less efficient. If the marginal cost of the firm is sufficiently close to the highest possible value according to the beliefs of the legislators and the regulator, the price the firm charges under the threat of regulation can be even lower than the price it has to charge when it is regulated. Our simulations also reveal how the welfares of consumers and the threatened firm may be affected in the short-run and long-run by possible variations in several attributes of our model, involving the marginal cost of production, the number of legislators, each legislator's cost of proposing a regulatory bill, the size of the market, and the weight of the firm's welfare in the social welfare function.

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  • Saglam, Ismail, 2018. "Self-Regulation Under Asymmetric Cost Information," MPRA Paper 87151, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:87151
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    References listed on IDEAS

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    1. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
    2. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
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    4. Heyes, Anthony G., 2005. "A signaling motive for self-regulation in the shadow of coercion," Journal of Economics and Business, Elsevier, vol. 57(3), pages 238-246.
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    6. Stephen Erfle & Henry McMillan, 1990. "Media, Political Pressure, and the Firm: The Case of Petroleum Pricing in the Late 1970s," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(1), pages 115-134.
    7. Amihai Glazer & Henry McMillan, 1992. "Pricing by the Firm Under Regulatory Threat," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(3), pages 1089-1099.
    8. Laffont,Jean-Jacques, 2005. "Regulation and Development," Cambridge Books, Cambridge University Press, number 9780521840187, September.
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    Cited by:

    1. Ismail Saglam, 2023. "Incentives of a monopolist for innovation under regulatory threat," Economics of Governance, Springer, vol. 24(1), pages 41-66, March.

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    More about this item

    Keywords

    Monopoly; regulation; self-regulation; asymmetric information.;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • 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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