Robust Monopoly Regulation
40 Pages Posted: 24 May 2023
Date Written: April 24, 2023
We study how to regulate a monopolistic firm using a robust-design, non-Bayesian approach. We derive a policy that minimizes the regulator's worst-case regret, where regret is the difference between the regulator's complete-information payoff and his realized payoff. When the regulator's payoff is consumers' surplus, he caps the firm's average revenue. When his payoff is the total surplus of both consumers and the firm, he offers a piece-rate subsidy to the firm while capping the total subsidy. For intermediate cases, the regulator combines these three policy instruments to balance three goals: protecting consumers' surplus, mitigating underproduction, and limiting potential overproduction.
Keywords: monopoly regulation, non-Bayesian, minimax regret, price cap, piece-rate subsidy, feed-in tariff
JEL Classification: D81, D82, D86
Suggested Citation: Suggested Citation