Regulating a Monopolist with Unknown Demand

Abstract

Optimal regulatory policy is derived in a setting where the firm has better knowledge of demand than the regulator. When marginal production costs increase with output, the regulator can induce the firm to use its private information entirely in the social interest. When marginal costs decline with output, however, the regulator is unable to derive any benefit from the firm's superior knowledge, and a single price is established that is invariant to demand.