Bargaining and Collusion in a Regulatory Model

Raffaele Fiocco and Mario Gilli

No 207, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: We consider the regulation of a monopolistic market when the prin- cipal delegates to a regulatory agency two tasks: the supervision of the firm's unknown costs and the arrangement of a pricing mechanism. As usual, the agency may have an incentive to hide information from the principal to share the informative rent with the firm. The novelty of this paper is that both the regulatory mechanism and the side con- tracting between the agency and the firm are modelled as a bargaining process. This negotiation between the regulator and the monopoly induces a radical change in the extraprofit from private information, which is now equal to the standard informational rent weighted by the agency’ bargaining power. This in turn a¤ects the collusive stage, in particular the firm has the greatest incentive to collude when fac- ing an agency with the same bargaining power. Then, we focus on the optimal organizational responses to the possibility of collusion. In our setting, where incompleteness of contracts prevents the design of a screening mechanism between the agency’ types and thus Tirole’ equivalence principle does not apply, we prove that the stronger the agency in the negotiation process, the greater the incentives for the principal to tolerate collusion in equilibrium.

Keywords: regulation; bargaining; collusion. (search for similar items in EconPapers)
JEL-codes: D73 D82 L51 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2011-03, Revised 2011-03
New Economics Papers: this item is included in nep-cta, nep-gth, nep-mic and nep-reg
References: View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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Related works:
Chapter: Bargaining and Collusion in a Regulatory Model (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:mib:wpaper:207

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