On the Pareto Efficiency of a Socially Optimal Mechanism for Monopoly Regulation

Ismail Saglam

MPRA Paper from University Library of Munich, Germany

Abstract: Baron and Myerson (BM) (1982)propose an incentive-compatible, individually rational and ex-ante socially optimal direct-revelation mechanism to regulate a monopolistic firm with unknown costs. We show that 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 epsilon-Pareto dominance. This concept requires the relevant dominance relationships to hold in the support of the regulator's beliefs everywhere but at a set of points of measure epsilon, which can be arbitrarily small. We show that a modification of the BM mechanism which always equates the price to the marginal cost can epsilon-Pareto dominate the BM mechanism at uncountably many regulatory environments, while it is never epsilon-Pareto dominated by the BM mechanism at any regulatory environment.

Keywords: Monopoly; Regulation; Asymmetric Information; Pareto Efficiency (search for similar items in EconPapers)
JEL-codes: D82 L51 (search for similar items in EconPapers)
Date: 2016-05-04
New Economics Papers: this item is included in nep-com, nep-mic, nep-pke and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/71090/1/MPRA_paper_71090.pdf original version (application/pdf)

Related works:
Working Paper: On the Pareto Efficiency of a Socially Optimal Mechanism for Monopoly Regulation (2016)
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:pra:mprapa:71090

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().