Monopoly Behavior, Decentralized Regulation, and Contestable Markets: An Experimental Evaluation

This study provides a comparative experimental evaluation of several alternative approaches to the (single-product) monopoly problem. We contrast incentive-compatible decentralized regulatory mechanisms with notions of market contestability in a decreasing-cost environment. The decentralized regulatory mechanisms are found to be significantly more effective at restraining monopoly power than is allowing direct contestability. But the regulatory mechanisms examined require that the regulatory agency know the market demand curve (though not the industry cost curve). Since this is significantly more information than is required to implement direct contestability, an interesting tradeoff is suggested: does the greater efficiency in monopoly restraint provided by the regulatory mechanism relative to direct contestability outweigh the former's greater informational requirements?