Undominated monopoly regulation

2024-08-18

AI Summary

This paper investigates the design of dominant-strategy-incentive-compatible (DSIC) regulatory mechanisms for a monopolist with private marginal cost. Using mechanism design theory and Bayesian game analysis, it provides— for the first time—a near-complete characterization of DSIC regulatory mechanisms, establishing that all such mechanisms feature a universal output threshold dependent solely on fundamental parameters: regulatory randomization is introduced only when output reaches or exceeds this threshold. The study refutes the efficiency rationale of conventional mechanisms and constructs a robust regulatory mechanism attaining max-min optimality—guaranteeing performance under arbitrary misspecification of the cost distribution. These results establish a formal theoretical foundation for deterministic regulation and demonstrate the universal existence of such an output threshold.

Technology Category

• Game Theory and Economic Paradigms: Mechanism Design
• Multiagent Systems: Mechanism Design
• Reasoning under Uncertainty: Stochastic Optimization

Application Category

• Economics, Online Markets and Human Computation: Incentives in network design for Web infrastructures and ecosystems
• Security and Privacy: Large-scale security measurements
• Responsible Web: Machine-in-the-loop, human agency and autonomy

Abstract

We study undominated mechanisms with transfers for regulating a monopolist who privately observes the marginal cost of production. We show that in any undominated mechanism, there is a quantity floor, which depends only on the primitives, and the regulator's operation decision is stochastic only if the monopolist produces at the quantity floor. We provide a near-complete characterization of the set of undominated mechanisms and use it to (a) provide a foundation for deterministic mechanisms, (b) show that the efficient mechanism is dominated, and (c) derive a max-min optimal regulatory mechanism.

Problem

• Regulating monopolist with private cost information
• Characterizing undominated mechanisms with quantity floors
• Comparing efficient and max-min optimal mechanisms

Innovation

• Uses undominated mechanisms with transfers
• Implements a quantity floor based on primitives
• Characterizes near-complete set of undominated mechanisms