Pretend-But Regulation of a Duopoly Under Three Competition Modes

Abstract

This paper considers a duopoly with asymmetric costs and demand uncertainty to study the welfare effects of the pretend-but-perform regulation (PPR) under three modes of competition, involving the Cournot, conjectural variations, and supply function competitions. The PPR induces a two-stage game where each firm declares in the first stage a cost report and produces in the second stage accordingly. Theoretically, characterizing and numerically computing the equilibrium of this game, we show that the consumer surplus increases if the PPR is applied under the Cournot competition and it decreases if the PPR is applied under the other modes of competition.