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Welfare and product testing by a regulated monopolist

✍ Scribed by Tim S. Campbell; Yuk-Shee Chan; Anthony M. Marino

Publisher
Springer US
Year
1991
Tongue
English
Weight
690 KB
Volume
3
Category
Article
ISSN
0922-680X

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✦ Synopsis

This paper studies a monopoly firm with the ability to conduct costly pre-market testing of its product in order to predict how safe this product is to consume. While there are private incentives to test, the amount of testing effort supplied by a monopolist need not be optimal. In a model which allows for an imperfect system of liability, we characterize and compare the allocations of testing effort and output at the full social optimum, the pure monopoly solution, and the second-best regulated optimum wherein the regulator chooses testing effort and the monopolist chooses output and price.

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