Regulation Design And Application Based On Contract Theory

Since the1980s, with the rapid development of economy, the industry economicsis studied and improved by many scholars. As game theory, information economicsand mechanism design theory are introduced to the research of industry economics,a new government regulation theory–incentive regulation theory emerges. From thenon, the theoretical basis and thinking ways of government regulation has undergonea fundamental change. In the economic activities, the regulator can often not knowthe firm’s exact information when he designs the regulatory policy, for example, thefirm’s production cost and the products’ demand, that is to say, the firm possessesprivate information. Therefore, the study of regulation problem and application underasymmetric information would be of practical significance and great theoretic value.In Chapter2, a regulation problem under bilateral unknown demand informationis studied, in which neither the regulator nor the firm knows the products’ market de-mand, they have respective estimates about the demand. A regulatory policy designmodel is developed with the purpose of maximizing social total surplus, the regulatorypolicy includes the products’ price, the firm’s output and the transfer payment. Theoptimal regulatory policy demonstrates that the different estimates affect the optimalregulatory policy under bilateral unknown information. In other words, the optimalregulatory policy focuses on whether the firm’s estimate about the market capacity isthe same as the regulator’s, or not. If the estimates of the regulator and the firm aboutthe market capacity are the same, the optimal output is the same as that under fullinformation, but the optimal price is distorted downward from that under full informa-tion, and the transfer payment is distorted upward from that under full information;If their estimates are different, this leads to different results: when the firm’s estimateis more optimistic than the regulator’s, the optimal price and the optimal output aremore than those under the case that they have the same estimate. Contrary to this case,when the firm’s estimate is more pessimistic than the regulator’s, the optimal price andthe optimal output are less than those under the case that they have the same estimate.Besides, under bilateral unknown information, the regulator allocates all surplus to the consumer, while the firm’s expected profit is always zero, regardless of the same es-timate or the different estimates, which specifies bilateral unknown information onlyaffects the consumer surplus.In Chapter3, a regulation problem under adverse selection and moral hazard isstudied, in which the products’ demand is the firm’s private information, and the firm’seffort level to increase demand is not observable by the regulator. A regulatory policynamed two-part tariffs design model is developed with the purpose of maximizingsocial total surplus. The results demonstrate that the regulator will set the firm’s effortlevel as zero under observable effort whether the market capacity is full or privateinformation. It is necessary for regulator to consider the difference between the effort’simpact on the demand and the price’s impact on the demand, which may generatedifferent distortion effects about the regulatory policy regardless of the market capacitybeing full or private information. In other words, based on the difference, the regulatorwill design different regulatory policies in order to maximize social total surplus.In Chapter4, the impact of price cap regulation (PCR) on supply chain contract-ing is discussed, in which the upstream monopolist’s cost type is private information, asupply chain contracting under PCR model is developed with the purpose of maximiz-ing the downstream monopolist’s profit. The contract strategy contains the products’retail price and transfer payment. The model’s optimal solution shows that, when theupstream monopolist’s type is full information, if tight or moderate PCR takes effect,it will make the retail price lower and the transfer payment increase, and sacrifice thedownstream monopolist’s profit, but benefit both the consumer’s surplus and the socialtotal welfare. When the upstream monopolist’s type is private information, if the reg-ulator implements moderate PCR, it will realize semi-separating equilibria contract; ifthe regulator implements tight PCR, it will arise polling equilibria contract. And mod-erate PCR and tight PCR result in lower profits of the downstream monopolist andthe upstream monopolist than that without PCR. Whereas the consumer are better offthan that without PCR. Private information can weaken PCR’s impact on the optimalcontract, and PCR can dampen the effect of private information.In Chapter5, a supply chain contracting faced by a dominant retailer in the pres-ence of a small retailer’s competition is considered, only one of the retailers has an opportunity to work with the supplier. The supplier’s cost and the small retailer’s costare private information, respectively. A supply chain contracting model is developedwith the purpose of maximizing the dominant retailer’s profit. The results demonstratethat the small retailer’s competition sacrifices partly the dominant retailer’s profit, butbenefits the supplier. The supplier’s private information lessens the dominant retailer’sprofit and the total supply chain profit, while the small retailer’s private informationwhich reduces the supplier’s profit plays no impact on the total supply chain profit,and lessens the dominated retailer’s loss.