Learning by Doing and Dynamic Regulation
From experience, regulated monopolists learn to employ cost-reducing innovations. We characterize the optimal regulation of an innovating monopolist with unknown costs. Regulatory policy is designed to minimize current costs of service while encouraging development of cost-saving innovations. We find that under optimal regulation, (i) innovation is encouraged by light-handed regulation allowing the monopolist to earn greater information rents while providing greater service, (ii) innovation occurs in the absence of long-term agreements when private information is recurring, and (iii) innovation is more rapid in a durable franchise, and the regulator prefers durable franchises for exploiting learning economies.
Year of publication: |
2002
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Authors: | Lewis, Tracy R. ; Yildirim, Huseyin |
Published in: |
RAND Journal of Economics. - The RAND Corporation, ISSN 0741-6261. - Vol. 33.2002, 1, p. 22-36
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Publisher: |
The RAND Corporation |
Saved in:
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