Monopoly regulation under Asymmetric Information: Prices v/s Quantities
Nicolás Figueroa; Leonardo Basso (U. de Chile) y Jorge Vásquez (Bank of Canada)
RAND Journal of Economics Forthcoming
We compare two instruments to regulate a monopoly that has private information about its demand or costs: fixing either the price or quantity. For each instrument, we consider sophisticated (screening) and simple (bunching) mechanisms. We characterize the optimal mechanisms and compare their welfare performance. With unknown demand and increasing marginal costs, the sophisticated price mechanism dominates that of quantity, whereas the sophisticated quantity mechanism may prevail when marginal costs decrease. The simple price mechanism dominates that of quantity when marginal costs decrease, but the opposite may arise if marginal costs increase. With unknown costs, both instruments are equivalent.
Keywords: Price regulation, quantity regulation, market power, mechanism design
JEL: D42, D82, L51