Regulating Oligopolistic Competition

TL;DR

This paper explores optimal regulation strategies for oligopolies with private cost information, proposing a simple policy involving price-based taxes, subsidies, and yardstick price caps to influence firm behavior.

Contribution

It introduces a minimal-structure regulatory policy that relies solely on firms' posted prices to implement effective regulation in oligopolistic markets.

Findings

Regulatory policy can be simplified to price-based taxes and subsidies.

Yardstick price caps depend on competitors' posted prices.

The approach effectively influences firm behavior in oligopolies.

Abstract

We consider the problem of how to regulate an oligopoly when firms have private information about their costs. In the environment, consumers make discrete choices over goods, and minimal structure is placed on the manner in which firms compete. In the optimal regulatory policy, the regulator need only solicit prices from firms, and based on those prices, charge them taxes or give them subsidies, and impose on each firm a ``yardstick'' price cap that depends on the posted prices of competing firms.