Robust Monopoly Regulation

We study the regulation of a monopolistic firm using robust-design approach. solve for policy that minimizes regulator's worst-case regret, where regret is difference between his complete-information payoff minus realized payoff. When consumers' surplus, it optimal to impose price cap. The cap balances benefit from more surplus consumers and loss underproduction. plus firm's profit, he offers piece-rate subsidy in order mitigate underproduction, but caps total so as not incentivize severe overproduction.