Eberhard Feess, Michael Paust
Implementing Efficient Market Structures: The Role of Information Transmission
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We extend the literature on the implementation of efficient market structures to private information on marginal costs. We consider a setting with an incumbent and two potential entrants whose costs can be either high or low. By setting the license fee appropriately, the regulator can induce truth-telling by the potential entrants, and can then implement the welfare-maximizing market structure. We distinguish between a disclosure policy, where the regulator reveals the types of entrants before the market game is played, and a concealment policy, where he keeps silent about types. While the concealment policy is predominant in practice, we show that the disclosure policy leads to higher social welfare.