Edited by Joseph E. Harrington Jr and Yannis Katsoulacos
Raffaele Fiocco and Mario Gilli1 12.1 INTRODUCTION The aim of this chapter is to examine the possibility of collusion in the regulation of a monopolistic market when a benevolent principal delegates to a regulatory agency two tasks: the supervision of the firm’s costs and the negotiation over a pricing policy. In this new setting we investigate the classic questions: which regulatory policy should we expect in such a situation? What are the characteristics of the collusive gains? Which is the best response to collusion? What are the determinants of this response? This chapter is an attempt to derive some preliminary results within this general setting. We consider a standard model of a three-tier regulatory hierarchy, where the political principal (Congress) directs the activities of a supervisor (the regulatory agency), which in turn oversees the operation of a monopoly (the regulated firm). We innovate the usual approach assuming that the principal delegates to the supervisor a general negotiation with the monopolist on the regulatory policy. The reason for this generalization is that usually regulation does not boil down to a passive enforcement of a policy, but actually involves a negotiation between the regulator and the firm. In other words, regulatory arrangements are generally the result of a give-and-take process rather than of a take-it-orleave-it offer, since the possibility of pre-committing to a specific offer is unrealistic. The literature on regulation has long recognized the relevance of introducing general bargaining processes in the interaction between regulator and firm. For example, Kahn (1971)...
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