Regulating oligopolistic competition

Abstract

We consider the problem of how to regulate an oligopoly when firms have private information about their costs. In the environment, consumers make discrete choices over goods, and minimal structure is placed on the manner in which firms compete. In the optimal regulatory policy, firms compete on price margins, and based on firms' prices, the regulator charges them taxes or give them subsidies, and imposes on each firm a “yardstick” price cap that depends on the posted prices of competing firms.