By Armstrong M., Porter R.H.

''The instruction manual displays the hot commercial economics instead of the previous structure-conduct-performance view. As such it positive aspects reliable idea and may be a useful resource booklet for somebody who desires to discover the 'state of the paintings' in business organisation.''...''In the distance of 1555 pages the scholar of business enterprise will locate almost about every little thing that concerns. ...''''...the concerns to which many of the authors draw our cognizance remain the prime ones in commercial Organisation.''

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Extra resources for Handbook of Industrial Organization, Volume 3

Sample text

C(q) = cq + F , where q is the number of units of output produced by the firm. In this case, the regulator can instruct the firm to sell its product at price equal to marginal cost in return for a transfer payment equal to F . Doing so ensures marginal-cost pricing and zero rent for the firm for both demand realizations, which is the full-information outcome. 27 More surprisingly, Proposition 4 states that the regulator can also ensure the fullinformation outcome if marginal cost increases with output.

1. Partially informed regulator: the use of audits First consider the setting where the firm is privately informed about its exogenous constant marginal cost of production (c ∈ {cL , cH }). Suppose that an imperfect public signal s ∈ {sL , sH } of the firm’s cost is available, which is realized after contracts have been signed. This signal is “hard” information in the sense that (legally enforceable) contracts can be written based on this information. This signal might be interpreted as the output of an audit of the firm’s cost, for example.

The difference in the firm’s operating profit at price p in state H versus state L will be denoted Δπ (p). For most of the following analysis, this difference is assumed to increase with p. Formally, Δπ (p) ≡ πH (p) − πL (p) and d π Δ (p) > 0. 34 Its role, as will be shown below, is to guarantee that the equilibrium price in state H is higher than in state L. The regulator seeks to maximize the expected value of a weighted average of consumer surplus and rent. The social cost of public funds is assumed to be zero.

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