Quantities vs. prices: monopoly regulation without transfer under asymmetric demand information

This paper examines the optimal monopoly regulation without transfer based on Basso, Figueroa and Vásquez (Rand J Econ 48(3):557–578, 2017), which compare the quantity-based and price-based instruments to regulate a monopoly that has better information concerning its market demand than the regulator. The optimal screening mechanisms, which offer multiple menus of contracts for the regulated firm to select, and pooling mechanisms, which only provide a uniform contract, are characterized for each instrument. Furthermore, the corresponding performances of the regulator’s social welfare are ranked. Results show that, with non-increasing marginal costs of the regulated firm, the screening price mechanism would strictly dominate the screening quantity mechanism. The pooling price mechanism is always preferred to the pooling quantity mechanism when the slope of marginal costs is negative or slightly positive. Otherwise, the pooling quantity mechanism may be superior depending on the relative magnitude of the slope of marginal costs and demand function.