A monopoly firm has an incentive to increase the price and decrease the produced quantity in order to increase its revenues. But this decreases the social welfare. The government can intervene in several ways, one of which is to set a maximum price for the product.

Ideally, the price set by the government should be equal to the equilibrium price, because then the social welfare is maximized. However, in order to know this socially-optimal price, the government must know the cost curve of the seller. A monopolist seller might decide to hide the true cost curve and claim that the cost is higher than it is, in order to make the government raise the maximum price.

MY QUESTION IS: what can a government do in order to approximate the socially-optimal price? I am interested in references to both theoretical suggestions and practical case-studies.

NOTE: I am interested even in a very simple case, in which the monopolist's price per unit can be assumed to be constant, so that the only hidden information is that constant.

  • $\begingroup$ I would also add that government can trace the social-optimum price observing the effects on the firm's profit. Intuitively, it is in line with the concept of revealed preferences and effectively results in econometric analysis. (You may look at Perloff "Microeconomics" for details) $\endgroup$ – user288406 Dec 20 '15 at 17:04

The following paper apparently deals with a very similar question:

Regulating a Monopolist with Unknown Costs In Ecnometrica (1982), pp. 911-930, doi:10.2307/1912769 by P. Baron, Roger B. Myerson

This and other similar papers can be found here.

  • $\begingroup$ Please include some non-reference information in your answer, otherwise your answer is useless for people who can't get access to the things you reference (link rot or inability to find that book). You should paraphrase the relevant parts of things you reference. $\endgroup$ – B T Mar 15 '16 at 18:58
  • $\begingroup$ @BT I have not read the papers yet. Only the abstract. In any case, I see in Google Scholar that the paper is available in 18 versions, some of them include a freely available PDF, so anyone interested can read it. $\endgroup$ – Erel Segal-Halevi Mar 16 '16 at 17:07
  • $\begingroup$ Yes, but if in a few years, those links become dead, your answer won't be very useful. Future readers would, i'm sure, appreciate it if you quoted or paraphrased the source when you get around to reading it : ) $\endgroup$ – B T Mar 16 '16 at 21:45
  • $\begingroup$ If articles in Econometrica - a top economics journal - become unavailable, then the economics world will have a much worse trouble than not being able to read my answer... $\endgroup$ – Erel Segal-Halevi Mar 17 '16 at 11:08
  • $\begingroup$ Look, its stack exchange policy that answers should quote or paraphrase references and links. Book references have a high barrier in relation to the value of the single piece of information this question is about. Almost no one is going to go out and find that book in a library or buy and then spend hours reading it just to be able to see the answer to this question. Therefore it is CURRENTLY unavailable to most people, regardless of whether its technically available for a very motivated person. $\endgroup$ – B T Mar 17 '16 at 19:37

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