Monopoly Regulation Under Asymmetric Information: Prices vs. Quantities

32 Pages Posted: 20 Jul 2015 Last revised: 31 Jul 2016

See all articles by Leonardo J. Basso

Leonardo J. Basso

Universidad de Chile - Civil Engineering Department

Nicolas Figueroa

Pontificia Universidad Catolica de Chile

Jorge Vásquez

Government of Canada - Bank of Canada

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

Basso, Leonardo J. and Figueroa, Nicolas and Vásquez, Jorge, Monopoly Regulation Under Asymmetric Information: Prices vs. Quantities (July 29, 2016). Available at SSRN: https://ssrn.com/abstract=2632941 or http://dx.doi.org/10.2139/ssrn.2632941

Leonardo J. Basso

Universidad de Chile - Civil Engineering Department ( email )

Casilla 228-3
Santiago
Chile
56 2 978 4380 (Phone)
56 2 689 4206 (Fax)

HOME PAGE: http://tamarugo.cec.uchile.cl/~dicidet/leo.html

Nicolas Figueroa

Pontificia Universidad Catolica de Chile ( email )

Av Libertador Bernardo O Higgins 340
Santiago Metropolitan Region
Chile

Jorge Vásquez (Contact Author)

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada

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