Optimality of Entry Regulation under Incomplete Information

The lack of complete information of the government has been considered as a barrier to the optimal regulation, as it is well-known in price regulations literature. However, it is not true for the entry regulation: This paper shows that the performance of the entry regulation under incomplete information can be better than that under full information. Under incomplete information, the incumbent firm would deviate from the monopoly behavior to signal itself as an efficient type and to trigger entry regulation which prevents excess entry in case that the incumbent is efficient. As a result, social welfare can be even higher than under full information, since not only the optimal post-entry market structure is achieved as under full information but the pre-entry price is even lower than that under complete information.