Regulating a Monopolist with Unknown Demand and Cost Functions

Tracy Lewis and David Sappington

No 225924, Working Papers from University of California, Davis, Department of Economics

Abstract: We consider the design of regulatory policy when the regulator is imperfectly informed about both the firm's cost function and the demand function it faces. To some extent, the optimal policy is the natural "combination" of the policies when there is uncertainty about demand alone or cost alone. But important qualitative differences also exist. For example, prices may optimally be set below marginal cost when there is uncertainty about both cost and demand, although prices will never fall below marginal cost when there is only a single source of uncertainty , whether it pertains to cost or demand.

Keywords: Financial; Economics (search for similar items in EconPapers)
Pages: 37
Date: 1987
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Journal Article: Regulating a Monopolist with Unknown Demand and Cost Functions (1988)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:ucdewp:225924

DOI: 10.22004/ag.econ.225924

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