REGULATING A DOMINANT FIRM - UNKNOWN DEMAND AND INDUSTRY STRUCTURE

In this article, we study the optimal regulation of a dominant firm wh en an unregulated firm actively competes. Generally, the existence of an active rival imposes new and binding constraints on regulatory prob lems. We characterize optimal policies both when demands are known (co mplete information) and unknown (incomplete information) to the regula tor. Optimal policies under complete information may set the price at the dominant firm above or below its marginal cost. Optimal policies u nder incomplete information may be either pooling or separating, const ant over a range of the prior distribution of the firm's private infor mation, and leave no information rent to the firm.