Research and Development of an Optimally Regulated Monopolist with Unknown Costs

Ismail Saglam

No 1502, IPEK Working Papers from Ipek University, Department of Economics

Abstract: This paper studies whether a monopolist with private marginal cost information has incentives to make cost-reducing innovations through research and development (R&D) when its output and price are regulated according to the incentive-compatible mechanism of Baron and Myerson (1982). Under several assumptions concerning the cost of R&D and the regulator's beliefs about the marginal cost, we characterize the optimal level of R&D activities for the regulated monopolist when these activities are observed by the regulator as well as when they are not. We show that the regulated monopolist always chooses a higher level of R&D activities when its activities are unobserved. In situations where the social welfare attaches a sufficiently high weight to the monopolist welfare, the monopolist's R&D activities in the unobservable case even realize at a higher level than its activities when its output and price are not regulated. Moreover, whenever R&D activities increase productive efficiency, a less efficient monopolist would choose a higher level of R&D activities than a more efficient monopolist, irrespective of the observability of R&D.

Keywords: Monopoly; Regulation; Research and Development (search for similar items in EconPapers)
JEL-codes: D82 L51 O32 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2015-07
New Economics Papers: this item is included in nep-cta, nep-ind, nep-ino, nep-mic and nep-reg
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Related works:
Working Paper: Research and Development of an Optimally Regulated Monopolist with Unknown Costs (2014)
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