Price Regulation vs Information Design

Abstract

How should regulators optimally use public information? I consider markets with two possible distortions: market power and adverse/advantageous selection. A signal (e.g., age) partitions consumers into types (e.g., young and old). Within each type, individuals differ in preferences and cost. I consider two regulatory regimes. First, price regulation (PR) constrains the difference in prices across types. Second, information design (ID) or Bayesian persuasion determines how much information to reveal about individuals. I characterize the optimal policy for each regime. Regulation is preferable to laissez-faire if high-price types experience larger distortions (but the appropriate measure of distortion differs across regimes). Then, I compare the two regimes. PR (ID) achieves a higher level of welfare if price increases imply increasing (decreasing) marginal welfare losses. This article shows how the optimal regulatory framework depends on the economic environment and characterizes optimal regulation in each case.

Keywords: Adverse Selection, Price Discrimination, Information Design

JEL Classification: D81, D82, D86, L52, D41, I13