Undominated monopoly regulation

Debasis Mishra and Sanket Patil

Journal of Economic Theory, 2025, vol. 228, issue C

Abstract: We study undominated mechanisms with transfers for regulating a monopolist who privately observes the marginal cost of production. A mechanism is undominated if no other mechanism gives the regulator a strictly higher payoff at some marginal cost of the monopolist without lowering the regulator's payoff at other costs. We show that an undominated mechanism has a quantity floor: whenever the monopolist is allowed to operate, it produces above a threshold quantity. Moreover, the regulator's operation decision is stochastic only if the monopolist produces at the quantity floor. We provide a near-complete characterization of the set of undominated mechanisms and use it to (a) derive a max-min optimal regulatory mechanism, (b) provide a foundation for deterministic mechanisms, and (c) show that the efficient mechanism is dominated.

Keywords: Regulation; Undominated mechanisms; Floor-randomized mechanisms; Downward distortion (search for similar items in EconPapers)
JEL-codes: D82 L51 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:228:y:2025:i:c:s002205312500095x

DOI: 10.1016/j.jet.2025.106049

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