Monopoly Regulation Under Relaxed Pareto Efficiency

Ismail Saglam

Studies in Microeconomics, 2017, vol. 5, issue 2, 162-176

Abstract: Abstract Baron and Myerson (BM; 1982, Econometrica, 50(4), 911–930) propose an incentive-compatible, individually rational and ex ante socially optimal direct-revelation mechanism to regulate a monopolistic firm with unknown costs. Their mechanism is not ex post Pareto dominated by any other feasible direct-revelation mechanism. However, there also exist an uncountable number of feasible direct-revelation mechanisms that are not ex post Pareto dominated by the BM mechanism. To investigate whether the BM mechanism remains in the set of ex post undominated mechanisms when the Pareto axiom is slightly weakened, we introduce the ∈-Pareto dominance. This concept requires the relevant dominance relationships to hold in the support of the regulator’s beliefs everywhere except for a set of points of measure ∈, which can be arbitrarily small. We show that a modification of the BM mechanism which always equates the price to the marginal cost can ∈-Pareto dominate the BM mechanism at uncountably many regulatory environments, while it is never ∈-Pareto dominated by the BM mechanism at any regulatory environment.

Keywords: Monopoly; regulation; asymmetric information; Pareto efficiency (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:sae:miceco:v:5:y:2017:i:2:p:162-176

DOI: 10.1177/2321022217704284

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