Abstract

http://ssrn.com/abstract=1735404
 


 



Regulated Competition Under Increasing Returns to Scale


Thomas Greve


University of Copenhagen - Department of Economics

Hans Keiding


University of Copenhagen - Department of Economics

December 30, 2010

Univ. of Copenhagen Dept. of Economics Discussion Paper No. 11-01

Abstract:     
This paper proposes a mechanism for the regulation of firms in the context of asymmetric information with the aim to induce firms to report its private information truthfully and to save information rents. Baron and Myerson (1982) have considered this problem and derived an optimal policy for regulating a monopolist with unknown costs. They show that it was possible to create a regulatory mechanism that induced the firm to report its private information truthfully. To secure this, a part of the mechanism is to pay the firm a subsidy. This article presents a regulatory mechanism which explores competition in the context of an industry characterized by increasing returns to scale. In contrast to the model in this article, the Baron and Myerson model doesn’t consider increasing returns to scale. In equilibrium each firm chooses to report truthfully without receiving any subsidy. However, the use of competition gives rise to an efficiency lost.

Number of Pages in PDF File: 17

JEL Classification: L51, L13

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Date posted: January 9, 2011 ; Last revised: March 23, 2011

Suggested Citation

Greve, Thomas and Keiding, Hans, Regulated Competition Under Increasing Returns to Scale (December 30, 2010). Univ. of Copenhagen Dept. of Economics Discussion Paper No. 11-01. Available at SSRN: http://ssrn.com/abstract=1735404 or http://dx.doi.org/10.2139/ssrn.1735404

Contact Information

Thomas Greve (Contact Author)
University of Copenhagen - Department of Economics ( email )
Copenhagen University Library
Licenssekretariatet Nørre Alle 49
DK-2200 Copenhagen N.
Denmark
Hans Keiding
University of Copenhagen - Department of Economics ( email )
Copenhagen University Library
Licenssekretariatet Nørre Alle 49
DK-2200 Copenhagen N.
Denmark
353-23089 (Phone)
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