Event Date
"Price Distribution Regulation"
Abstract. I study the optimal price-based regulation of a Mussa-Rosen monopolist. Such a monopolist screens consumers on their taste for quality type, and optimally distorts qualities downwards, especially for low types. I consider a regulator who, as a remedy, regulates the distribution of transacted prices that the monopolist's selling mechanism generates. Price distribution regulation is the most powerful regulation which relies only on price data (a desirable feature when quality is non-verifiable or difficult to directly regulate). Therefore, it provides insight for practical regulations: any market outcome which the regulator cannot obtain via price distribution regulation cannot be obtained via any price-based regulation. Price distribution regulation features two regulatory frictions. First, the regulator is unable to direct surplus to low-type consumers. When the regulator prefers consumer to producer surplus, this leads her to optimally distort low types' qualities above the efficient level, reversing the usual Mussa-Rosen distortion. When the regulator further separates surplus for different consumer types, if the monopolist's participation constraint does not bind, a more equity-focused regulator will pursue a less distortive policy, which harms all consumer types and helps the monopolist. Second, the monopolist may fulfill the price distribution constraint by using a randomized selling mechanism. I develop a novel technique for convex optimization on majorization sets to characterize how this possibility further restricts the regulator. For many model primitives and regulator objectives, it does not.