Regulation at Home, Competition Abroad: A Theoretical Framework
This paper analyses in a hidden characteristic set-up the design of the optimal price for a firm which is a monopolist at home but competes abroad against foreign firms. As long as diseconomies of scope are not too strong, the optimal price is identified. The price rule depends on the sign of the technological relationship between home output and foreign output. With economies of scope, the regulator should set a price below marginal cost, in order to help the firm in the foreign market, and vice-versa with diseconomies of scope. Informational asymmetry introduces a distortion in the price rule, which is usually amplified by the existence of a foreign market.