This paper considers the problem of how to regulate duopolistic firms, only one of whose costs is known to the regulator, assuming that the regulator knows the general distribution of tastes and demands in the market, but can not distinguish among buyers prior to an actual sale. In the optimal rigulatory policy, prices are designed as functions of the cost-unknown firm's cost reports so that expected social welfare is maximized, subject to the constraints that the firm has nonegative profit and has no incentive to misrepresent its costs, permitting partial discrimiantion among consumers of varying intensities of demand. This paper explicitly derives the optimal policy and analyzes its properties.
