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The Bayesian approach to monopoly regulation after 40 years

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Abstract

This paper surveys the monopoly regulation literature with the Bayesian approach. The literature builds on Baron and Myerson’s seminal 1982 paper, entitled “Regulating a Monopolist with Unknown Costs.” After presenting their contributions to the regulation literature, the paper discusses the main criticisms of their model, relating to either informational or commitment assumptions about the Bayesian regulator. The paper also briefly reviews some non-Bayesian incentive schemes, price-cap regulation, and several extensions and applications of Baron and Myerson’s regulatory model to highlight the evolution and scope of the new economics of regulation after 40 years.

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Notes

  1. Vogelsang (2002) reports that twenty years after the emergence of the Bayesian approach the most popular regulatory mechanism in the U.S. telecommunication sector is price cap regulation which is a hybrid between Bayesian and non-Bayesian mechanisms. In Sect. 5, we will briefly review some non-Bayesian mechanisms and price-cap regulation.

  2. These insights of K–S were formally elaborated by Işık (2007), who integrated the outcome of the B–M model with a computational bargaining game over admissible beliefs using the incentive-efficient bargaining model of Myerson (1979) under asymmetric information.

  3. Littlechild (2009, p. 96) reports that “the mean value of a rate reduction was eight times larger with a stipulation than without; the median value was more than 50 times larger”.

  4. See Armstrong and Sappington (2007, pp. 1583–1586) for a brief review and discussion.

  5. In related works, Cantner and Kuhn (1999) and Saglam (2019) consider a simpler setup, a one-period extension of the B–M model, to understand R &D incentives of a regulated monopolist. Whereas Cantner and Kuhn (1999) consider, like Baron and Besanko (1984a, 1984b), both the case of unobservable and non-contractible R &D investment and the case of observable and contractible R &D investment, Saglam (2019) studies the remaining possibility, namely observable but non-contractible investment. Differing from earlier studies, Lewis and Yildirim (2002) consider a regulated multi-period industry where the cost-reducing innovation occurs not due to research and development investment of the monopolist but because of its ability of learning by doing.

  6. For non-Bayesian regulatory schemes without transfers, see Vogelsang and Finsinger (1979), Vogelsang (1989), Brennan (1989), and Neu (1993), among others.

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Acknowledgements

The author is very grateful to an anonymous reviewer for many suggestions and corrections that have greatly improved this paper. The usual disclaimer applies.

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  1. Department of Economics, TOBB University of Economics and Technology, Sogutozu Cad. No. 43, 06560, Sogutozu, Ankara, Turkey

    Ismail Saglam

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Saglam, I. The Bayesian approach to monopoly regulation after 40 years. J Regul Econ 65, 108–136 (2024). https://doi.org/10.1007/s11149-023-09470-1

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