Optimal Regulation of a Multiproduct Monopoly with Unknown Technological Capabilities

This article examines the optimal strategy for a regulator who seeks to maximize expected consumers' surplus and who faces some uncertainty about the technological capabilities of the firm being regulated. It is shown that the optimal strategy will generally induce the firm to adopt a cost structure other than the most efficient one and to produce an output vector other than the Ramsey vector of outputs, even though it is within the regulator's power to avoid such inefficient outcomes. The cross subsidies that arise under the optimal regulatory plan are also characterized.