Raffaele Fiocco

Bargaining and Collusion in a Regulatory Model

Within a standard three-tier regulatory model, a benevolent principal delegates to a regulatory agency two tasks: the supervision of the …rm’s (two-type) costs and the arrangement of a pricing mechanism. The agency may have an incentive to manipulate information to the principal to share the gains of collusion with the …rm. The novelty of this paper is that both the regulatory mechanism and the side contracting between the agency and the …rm are modelled as a bargaining process. While as usual the ine¢ cient …rm does not have any interest in cost manipulation, we …nd that the e¢ cient …rm has an incentive to collude only if the agency’s bargaining power is high enough, and the total gains of collusion are now lower than those the two partners would appropriate if the agency could make a take-it-or

The optimal industry structure in a vertically related market

We consider a vertically related market characterized by down- stream imperfect competition and by the monopolistic provision of an essential facility-based input, whose price is set by a social-welfare maximizing regulator. Our model shows that the regulatory knowl- edge about the cost for providing the monopolistic input crucially af- fects the design of the optimal industry structure. In particular, we compare ownership separation, which prevents a single company from having the control of both upstream and downstream operations, and legal separation, under which these activities are legally unbundled but common ownership is allowed. As long as the regulator has full infor- mation, the two industry patterns yield the same social welfare level. However, under asymmetric information about the input costs legal separation can make the whole society better off.

The regulation of markets with interdependent demands

We examine the regulatory design of a market for products with interdependent demands, where regulated firms provide (imperfect) substitutes and can engage in lobbying activities. Under centralized regulation, a single regulator is established, whose mandate is to maximize aggregate welfare. Under decentralized regulation, each firm is assigned to a regulator charged with maximizing the welfare generated by that firm. With asymmetric cost information, centralized regulation results in a negative externality between firms when engaging in lobbying. Decentralized regulation removes this externality and reduces lobbying. Since this benefit comes at the cost of miscoordination between regulators, a trade-off results which favors decentralized regulation when goods are substitutes enough.

Consumer Standards as a Strategic Device to Mitigate Ratchet Effects in Dynamic Regulation

Strategic delegation to an independent regulator with a pure consumer standard improves dynamic regulation by mitigating ratchet effects associated with short term contracting. A pure consumer standard alleviates the regulator’s myopic temptation to raise output after learning the firm is inefficient. Anticipating this tougher regulatory behavior, efficient firms find it less attractive to exaggerate costs. This reduces the need for long term rents and mitigates ratchet effects. A welfare standard biased towards consumers entails, however, allocative costs arising from partial separation of the firms’ cost types. A trade-off results which favors strategic delegation when efficient firms are relatively likely.

The Optimal Institutional Design of Vertically Related Markets with Unknown Upstream Costs

Abstract This paper examines the design of vertically related industries with a regulated monopolistic upstream input and competitive downstream activities. Two institutional patterns are investigated. Ownership separation entails full unbundling between upstream and downstream activities. Legal separation allows a downstream firm to own the upstream monopolist but requires the two entities to be legally unbundled so that each service is stand-alone profitable and only upstream profits are regulated. Under regulatory limited information about upstream costs, the legally separated monopolist exhibits countervailing incentives to manipulate costs. This alleviates the regulator’s control problem and yields higher welfare than ownership separation.

Strategic Inventories under Limited Commitment

In a dynamic storable good market where demand changes over time, we investigate the producers strategic incentives to hold inventories in response to the possibility of buyer stockpiling. The literature on storable goods has demonstrated that buyer stockpiling in anticipation of higher future prices harms the producers profitability, particularly when the producer cannot commit to future prices. We show that the producers inventories act as a strategic device to mitigate the loss from the lack of commitment. Our results provide a rationale for the producers inventory behavior that sheds new light on the well-documented empirical evidence about inventories.

The Design of Industry Structure in a Vertically Related Market

We consider a vertically related market characterized by downstream imperfect competition and by the monopolistic provision of an essential facility-based input, whose price is set by a regulatory agency. Two possible industry patterns are examined: the regime of ownership separation, which prevents a single company from having the control of both upstream and downstream operations, and that of legal separation, under which these activities are legally unbundled but common ownership is allowed. We find that with regulatory limited knowledge about the input costs legal separation creates countervailing incentives within the vertical group to use strategically its private information, which the regulator can exploit to improve social welfare.