Robust Monopoly Regulation

Yingni Guo; Eran Shmaya

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arXiv · 1910.04260

Robust Monopoly Regulation

Yingni Guo·Eran Shmaya

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Abstract

We study the regulation of a monopolistic firm using a robust-design approach. We solve for the policy that minimizes the regulator's worst-case regret, where the regret is the difference between his complete-information payoff minus his realized payoff. When the regulator's payoff is consumers' surplus, it is optimal to impose a price cap. The optimal cap balances the benefit from more surplus for consumers and the loss from underproduction. When his payoff is consumers' surplus plus the firm's profit, he offers a piece-rate subsidy in order to mitigate underproduction, but caps the total subsidy so as not to incentivize severe overproduction.

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Yingni Guo, Eran Shmaya. 2019-10-09. Robust Monopoly Regulation. https://arxiv.org/abs/1910.04260

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