Robust Monopoly Regulation
American Economic Review · 2025 · Volume 115 · Issue 2
Abstract
We study how to regulate a monopolistic firm using a robust-design, non-Bayesian approach. We derive a policy that minimizes the regulator's worst-case regret, where regret is the difference between the regulator's complete-information payoff and his realized payoff. When the regulator's payoff is consumers' surplus, he caps the firm's average revenue. When his payoff is the total surplus of both consumers and the firm, he offers a piece rate subsidy to the firm while capping the total subsidy. For intermediate cases, the regulator combines these three policy instruments to balance three goals: protecting consumers' surplus, mitigating underproduction, and limiting potential overproduction.
Keywords
Firm Behavior: Theory, Market Structure, Pricing, and Design: Monopoly, Search, Learning, Information and Knowledge, Communication, Belief, Unawareness, Business Taxes and Subsidies including sales and value-added (VAT), Economics of Regulation
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