Robust Monopoly Regulation

40 Pages Posted: 24 May 2023

See all articles by Yingni Guo

Yingni Guo

Northwestern University

Eran Shmaya

Tel Aviv University - School of Mathematical Sciences

Date Written: April 24, 2023

Abstract

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

Guo, Yingni and Shmaya, Eran, Robust Monopoly Regulation (April 24, 2023). Available at SSRN: https://ssrn.com/abstract=4445497 or http://dx.doi.org/10.2139/ssrn.4445497

Yingni Guo (Contact Author)

Northwestern University

2211 Campus Dr
Evanston, IL 60208
United States

Eran Shmaya

Tel Aviv University - School of Mathematical Sciences ( email )

Tel Aviv 69978
Israel

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