How affordable basic options can make monopoly regulation more redistributive

Regulating who benefits

Regulation is often evaluated by adding up benefits across consumers. But the same total benefit can be distributed very differently. A policy might chiefly help people willing to pay for premium service, or instead improve access to an affordable basic option.

In Inequality-Aware Regulation, Mikael Mäkimattila asks how regulation should change when those differences matter. The paper is an arXiv preprint presenting mathematical results, not an empirical evaluation of a particular policy.

Its central finding is conditional: when a regulator gives at least as much welfare weight to consumers with lower willingness to pay, affordable basic options can be the optimal regulatory requirement. The firm can remain free to design and price premium offerings.

Two layers of hidden information

The model contains a single profit-maximizing supplier selling options that differ in quality and price. Consumers privately know their willingness to pay for quality. The supplier privately knows its production costs.

A firm that offers different packages to encourage consumers to sort themselves by willingness to pay is called a screening monopolist. Here, screening also happens one level above: the regulator offers different contracts so firms with different costs select different requirements.

The regulator moves first. The firm then chooses a regulatory contract or shuts down. If it operates, it must offer the required quality–price options, but it may add others. Consumers finally choose an option or decline to buy.

The regulator evaluates consumer benefits after payment and firm profit using welfare weights: measures of how socially valuable an additional unit of money is to each recipient. In the main analysis, lower-willingness-to-pay consumers receive weakly higher weights, and consumers on average receive greater weight than the firm.

The author uses mathematical optimization and incentive-compatibility arguments to identify contracts under which consumers choose their intended options and the firm prefers its intended contract, even after redesigning its additional offers.

Why protecting the basics can work

The optimal policy takes the form of baseline regulation. It requires basic options chosen by lower-willingness-to-pay consumers while leaving premium offers to the firm. Basic quality lies between the corresponding unregulated monopoly level and the level that maximizes total surplus—the benefits of quality minus production costs.

The mechanism connects basic affordability to premium pricing. A better basic option gives premium buyers a more attractive alternative, limiting what the firm can charge them. Conversely, limiting basic quality makes that option less attractive to premium buyers, allowing more revenue to support inexpensive basic provision.

The required options therefore protect more than their direct users. Under the paper’s maintained assumptions, every consumer gains utility relative to unregulated monopoly when the firm operates. Premium buyers benefit because they can always choose a protected basic option instead.

Private costs create another trade-off. Lower-cost firms must retain some profit to make truthful self-selection worthwhile. These information rents rise with quality requirements. More demanding provision can therefore mean leaving more surplus to the firm or accepting shutdown at higher costs.

Stronger redistribution need not mean higher quality

The model predicts that stronger emphasis on lower-willingness-to-pay consumers can reduce basic quality while improving the lowest consumer’s welfare. The accompanying price reduction at least compensates that consumer for the quality loss.

Under specific, strong redistributive conditions, just one basic option per regulatory contract suffices. These conditions include assigning zero direct welfare weight to consumers above a willingness-to-pay threshold, together with a technical condition favoring a shared basic option among lower types. This is not a claim that any stronger concern about inequality automatically makes one option optimal.

Stronger redistribution also weakly lowers the cost threshold for operation. Gains while service continues must therefore be distinguished from the possibility of shutdown.

Where the conclusion applies

The analysis models one market and takes willingness to pay and welfare weights as given, rather than jointly designing income taxation. Its main results also maintain a condition ensuring strictly positive utility for the lowest-willingness-to-pay consumer whenever the firm operates.

Crucially, willingness to pay need not measure economic resources. If it instead reflects need, prioritizing low willingness to pay may be inappropriate. An extension with known costs shows that prioritizing high-willingness-to-pay consumers can instead justify a subsidized premium option. The corresponding private-cost problem remains open.

The paper discusses broadband and care policies resembling baseline regulation. These are motivating examples, not evidence that the model establishes their real-world effects.