Robust Monopoly Regulation

Yingni Guo and Eran Shmaya

American Economic Review, 2025, vol. 115, issue 2, 599-634

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.

JEL-codes: D21 D42 D83 H25 L51 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1257/aer.20191950

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