Journal of Regulatory Economics

, Volume 6, Issue 1, pp 97-108

Regulating oligopolistic industries: A generalized incentive scheme

  • Sylvia SchwermerAffiliated withInstitute of Public Sector Economics, Free University of Berlin

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This paper deals with the design of regulatory mechanisms for oligopolistic industries. The proposed incentive scheme consists of two parts: a subsidy depending upon a firm's contribution to an equilibrium price reduction, and a tax equal to the profit of the previous period. This mechanism is as effective in regulating oligopolies as the well-known incremental surplus subsidy scheme in a monopoly framework. The proposed scheme provides appropriate incentives to enforce competitive behavior in a Cournot oligopoly. The scheme is welfare improving even if firms collude.