Regulatory design under asymmetric information about demand

Paula Sarmento and Antonio Brandao

CEF.UP Working Papers from Universidade do Porto, Faculdade de Economia do Porto

Abstract: In this paper we compare the costs of two regulatory policies about the entry of new firms. We consider an incumbent firm that has more information about the market demand than the regulator. Then, the incumbent firm can use this advantage to persuade the regulator to make entry more difficult. With the first regulatory policy the regulator uses the incumbent price pre-regulation to get information about the demand. With the second regulatory policy the regulator design a mechanism to motivate the incumbent firm to price truthfully. We conclude that, for enough high values of the probability of low demand, the welfare is higher with the second (more active) regulatory policy.

Keywords: asymmetric information; entry regulation; signalling; adverse selection (search for similar items in EconPapers)
JEL-codes: C73 D82 L13 L51 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2008-05
New Economics Papers: this item is included in nep-bec, nep-com, nep-cta, nep-ent, nep-ind, nep-mic and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:por:cetedp:0802

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