Regulating a Monopolist through Capacity Control

Dihan Zou

Papers from arXiv.org

Abstract: We study monopoly regulation when capacity is contractible but subsequent output is not. A firm privately observes its production cost before installing costly capacity and then choosing output, while the regulator cannot use transfers. We provide sufficient conditions under which a single capacity floor implements an optimal mechanism with full participation. The floor raises output by changing investment while leaving utilization to the firm after installation costs are sunk. Under additional conditions, the allocation has three regions: laissez-faire, full utilization of the floor, and underutilization. High-cost types knowingly install capacity they will not fully use, yet produce more than under laissez-faire. This physical waste is a necessary evil of optimal regulation that expands service. We also show that underutilization can persist in optimal regulation with capacity-contingent subsidies or a common entry fee.

Date: 2026-10, Revised 2026-10
References: Add references at CitEc
Citations:

Downloads: (external link)
https://arxiv.org/pdf/2610.07189 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2610.07189

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().