Regulation of Monopolies A Randomized Approach *)

Two formal models are proposed to describe the gains of randomizing the regulation and price control of monopolies. In the first model, a monopolist faces a nonzero probability of being regulated by the authorities due its pricing policy. This leads to a self-regulation. Threat of regulation induces monopoly to pay a risk premium to consumers in a form of reduced product price. The analytical solution of model leads to a form that may have some practical relevance in empirical research. Second model shows, if monopolies are allowed for, that the randomized non-competitive product price control implies a higher social welfare than without randomization. The used indirect utility function approach enables us to show that the social welfare function is non-concave in some region of monopoly prices. The implications of the models for competition policy are clear. In some cases the breaking up the monopolies is not the only alternative. A randomized price regulation policy can give results that are welfare and efficiency improving. *) Paper presented at SCANDALE “Competition, Law and Economics” conference in Tartu, Estonia, August 5-7, 2004