Paula Sarmento

Incomplete Regulation, Asymmetric Information, and Collusion-Proofness

In an incomplete regulation framework the Regulator cannot replicate all the possible outcomes by himself since he has no influence on some firms present in the market. When facing asymmetric information regarding the regulated firm’s costs, it may be better for the Regulator to allow the other competitors to extract a truthful report from her through side-payments in a collusion and therefore the “Collusion-Proofness Principle” may not hold. In fact, by introducing an exogenous number of unregulated competitors, Social Welfare differences seem to favour a Collusion-Allowing equilibrium. However, such result will strongly depend on the relative importance given by the Regulator to the Consumer Surplus.

Entry Regulation under Asymmetric Information about Demand

We investigate how an incumbent firm can use the regulatory policy about entry and the informational advantage to protect his market position. This question is studied through the construction of a signalling game where we assume that the regulator has less information about demand than the firms. We conclude that there is a pooling equilibrium and partially separating equilibria in which entry is deterred and, if demand is high, there will be insufficient entry. The final effect on welfare depends on the tradeoff between short-run benefits (lower price) and long-run losses (weaker competition).