Bridging bargaining theory with the regulation of a natural monopoly

Abstract

In this paper, we integrate the bargaining theory with the problem of regulating a natural monopoly under symmetric information or asymmetric information with complete ignorance. We prove that the unregulated payoffs under symmetric information and the optimally regulated payoffs under asymmetric information define a pair of bargaining sets which are dual to (reflections of) each other. Thanks to this duality, the bargaining solution under asymmetric information can be obtained from the solution under symmetric information by permuting the implied payoffs of the monopolist and consumers provided that the bargaining rule satisfies anonymity and homogeneity. We also show that under symmetric (asymmetric) information the bargaining payoffs (permuted payoffs) obtained under the Egalitarian, Nash, and Kalai-Smorodinsky rules are equivalent to the Cournot-Nash payoffs of unregulated symmetric oligopolies, involving two, three, and four firms, respectively. Moreover, we characterize two bargaining rules using, in addition to (weak or strong) Pareto optimality, several new axioms that depend only on the essentials of the regulation problem.