Collusion Under Asymmetric Information: The Role of the Correlation

Jerome Pouyet

Journal of Public Economic Theory, 2002, vol. 4, issue 4, 543-572

Abstract: We consider the regulation of a duopoly under incomplete information. When firms act noncooperatively, the regulator uses yardstick mechanisms to bridge his informational gap at no cost. However, this provides the firms with an incentive to collude. We interpret the correlation as a measure of the congruence/divergence between individual and coalitional incentives. Under positive correlation, these incentives are aligned: the threat of collusion forces the regulator to distort the allocation. Under negative correlation, these incentives are opposed: the regulator can, sometimes, exploit this conflict of interest inside the coalition to eradicate the stakes of collusion at no cost.

Date: 2002
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