Price Regulation vs Information Design

43 Pages Posted: 24 Mar 2020 Last revised: 26 May 2021

Date Written: March 25, 2021

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

Suggested Citation

Veiga, Andre, Price Regulation vs Information Design (March 25, 2021). Available at SSRN: https://ssrn.com/abstract=3545479 or http://dx.doi.org/10.2139/ssrn.3545479

Andre Veiga (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

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