Monopoly Regulation Under Asymmetric Information: Prices vs. Quantities
32 Pages Posted: 20 Jul 2015 Last revised: 31 Jul 2016
Date Written: July 29, 2016
Abstract
We compare two instruments to regulate a monopoly that has private information about its demand: fixing the price or the quantity produced. For each instrument, we consider two classes of mechanisms: sophisticated (screening menus) and simple (single menus). We characterize the optimal mechanisms for every instrument and make between- and within-welfare comparisons. When demand is unknown and marginal costs are increasing, the sophisticated price mechanism dominates that of quantity, while the sophisticated quantity mechanism may prevail when marginal costs are decreasing. The simple price mechanism dominates that of quantity when marginal costs are decreasing, but the opposite may arise if marginal costs are increasing. We explore what proportion of welfare gains achievable by sophisticated regulation can be secured using simpler mechanisms and also discuss the case regarding private information about the monopoly’s costs
Keywords: Price regulation, quantity regulation, monopoly regulation, mechanism design
JEL Classification: D42, D82, L51
Suggested Citation: Suggested Citation