Bargaining and regulation with asymmetric information about demand and supply (Q1115823)

The author considers the rate regulation process in which consumers and the firm negotiate on output and prices as a bargaining process. Central features of the model are about preferences of the consumers and costs by the regulated firm and incentive efficiency of bargaining. The strategies of the firm and the consumers are considered taking into account incentive compatibility. The feasible set of transactions is characterized. The set of interim incentive efficient mechanisms in the sense of Holmström and Myerson for the direct revelation game is given. The efficiency of nonlinear pricing, monopsony nonlinear compensation schedules, and the Baron-Myerson regulation model is shown. For particular forms of consumer ``willingness to pay functions'' and firm ``marginal cost functions'', the set of interim efficient mechanisms may also include mechanisms which are fully information efficient. Bilateral asymmetric information may lead to pooling across consumer types, firm types or both at Bayesian equilibria of the direct revelation game. In this case, the regulatory process may involve efficiency losses due to incomplete information about either consumer or firm characteristics. The article enlarges our knowledge about the efficiency of the regulatory process and is also technically advanced. The disadvantage of this and related literature is the rather narrow approach disregarding the effects of alternative regulation possibilities as well as procedures and its very limited policy relevance.