Collusion in regulated pluralistic markets

Collusion in regulated pluralistic markets
Document type
Discussion paper
Crea, Giovanni; Miraldo, Marisa; Longo, Roberta
Imperial College Business School
Date of publication
1 August 2014
Trends: economic, social and technology trends affecting business
Business and management
Material type

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This paper analyses incentives for cooperative behaviour when heterogeneous providers are faced with regulated prices under yardstick competition. Providers are heterogeneous in the degree to which their interests correspond to those of the regulator, with close correspondence labelled altruism. Deviation of interests may arise as a result of de-nationalisation or when private providers enter predominantly public markets. The paper assesses how provider strategies and incentives to collude relate to provider characteristics under yardstick competition regulation.

The results suggest that under the yardstick competition each provider’s choice of cooperative cost is decreasing in the degree of the other provider’s altruism, so a self-interested provider will operate at a lower cost than an altruistic provider. The prospect of defection serves to moderate the chosen level of operating cost. More general results show that collusion is more stable in homogeneous than in heterogeneous markets; in markets served by purely altruistic providers there is no collusion on costs while in markets served by purely self-interested providers there is scope for collusion. The analysis demonstrates that it is important to consider the composition of the market when designing yardstick competition arrangements.

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