Mikael Mäkimattila, Aalto University

"Inequality-Aware Regulation"

Abstract

I study optimal monopoly regulation when inequality is a concern and both buyers and the firm hold private information. Correlation between buyers’ privately known valuations for quality and their welfare weights justifies inequality-aware pricing: the regulator mandates that the firm offer an inexpensive basic-quality option while granting the firm full flexibility in pricing premium qualities. However, the firm’s private information about its demand creates a trade-off between redistribution among buyers and redistribution across the two sides of the market. The optimal regulatory mechanism combines inequality-aware pricing with cost-plus pricing, where the firm is required to offer each type of the good at cost plus a fixed fee. I also analyze buyer-side subsidies as an alternative to firm-side regulation.

Contact person: Peter Norman Sørensen