Implementable Motivation Mechanisms for Monopoly and Deep Disequilibria

Wierzbicki, A.P. (1981). Implementable Motivation Mechanisms for Monopoly and Deep Disequilibria. IIASA Working Paper. IIASA, Laxenburg, Austria: WP-81-125

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Abstract

Problems of economic reforms of centrally planned economies are often related to the questions of price formation mechanisms. A decentralized competitive price formation would be desirable, but is usually considered infeasible because of monopolistic positions of many producers and because of deep disequilibria situations arising during a reform. The paper surveys known antimonopolistic taxation, reward or motivation mechanisms that make decentralized price formation possible. A new, robust mechanism of a price-dependent modification of the revenue function is proposed and analyzed. While such mechanisms might work well in the short-term equilibrium case, they do not necessarily motivate a long-term equilibrium; strategic problems related to attaining long-term equilibrium are discussed. For the deep disequilibria case, another type of mechanisms is needed. A price-dependent modification of the profit function is shown to result in a robust motivation mechanism implementable for deep disequilibria (without market influence). Various aspects of implementability of motivation mechanisms are discussed in the paper; it is also shown that an introduction of another agent -- a distributor with properly chosen motivation -- might resolve many problems of antimonopolistic motivation.

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