Undominated monopoly regulation

TL;DR

This paper characterizes undominated regulatory mechanisms for monopolists with private cost information, revealing the existence of a quantity floor and providing insights into the structure and optimality of such mechanisms.

Contribution

It offers a near-complete characterization of undominated mechanisms, demonstrating the dominance of the efficient mechanism and deriving a max-min optimal regulation.

Findings

Existence of a quantity floor depending on primitives.

Efficient mechanism is dominated in this setting.

Derived a max-min optimal regulatory mechanism.

Abstract

We study undominated mechanisms with transfers for regulating a monopolist who privately observes the marginal cost of production. We show that in any undominated mechanism, there is a quantity floor, which depends only on the primitives, and the regulator's operation decision is stochastic only if the monopolist produces at the quantity floor. We provide a near-complete characterization of the set of undominated mechanisms and use it to (a) provide a foundation for deterministic mechanisms, (b) show that the efficient mechanism is dominated, and (c) derive a max-min optimal regulatory mechanism.