A regulatory adjustment process for optimal pricing by multiproduct monopoly firms

Abstract

This paper describes an incentive mechanism that is shown to enforce the use of Ramsey prices by multiproduct monopolies. The constraint given is simple. It limits information requirements on the regulatory agency to bookkeeping data of the firm. Its implementation could be easily controlled by outside courts or auditors. The process, therefore, makes use of invisible hand properties shifting the workload of welfare optimization from the regulatory agency to the regulated firm. This may lead to the ironical conclusion that regulatory commissions should fire their economists. It, however, becomes both profitable and socially beneficial for the regulated firms to employ them. *University of Bonn and M.I.T. Energy Laboratory, Cambridge, Mass.; University of Bonn and International Institute of Management, Berlin, respectively. We owe thanks to various readers of a previous version. Truman Bewley, Peter Diamond, Jonathan Goodman, Ray Hartman, Martin Hellwig, Roger Sherman, Christian von Weizs'acker and an anonymous referee will find that their suggestions have left traces in this paper.