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Monopoly regulation under asymmetric information: prices versus quantities
Author(s) -
Basso Leonardo J.,
Figueroa Nicolás,
Vásquez Jorge
Publication year - 2017
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12187
Subject(s) - marginal cost , monopoly , economics , microeconomics , marginal utility , mechanism (biology) , private information retrieval , simple (philosophy) , welfare , market economy , computer science , philosophy , computer security , epistemology
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.