Regulating a Monopoly with Quality Choice under Asymmetric Information

Using a model where a monopoly chooses its commodity's quality as well as its quantity, we consider optimal regulation whenthe monopoly's costs are unknown to the regulator. Regarding quantity and quality, the results are a natural extension of Baron and Myerson (1982): the levels of quantity and quality are lower under asymmetric information than under symmetric information. Unlike their work, however, the price level can be higher or lower under asymmetric information, depending on the elasticity of consumers' marginal willingness to pay for quality.