Collusion Under Asymmetric Information and Institutional Incompleteness

We study collusion between a regulated firm and an unregulated competitor selling differentiated goods in a common market. There exists an institutional incompleteness that prevents the regulator from contracting with the competitor. Due to this, the effectiveness of yardstick mechanisms can be impaired by some behavior of the unregulated firm intended at concealing information from the regulator. With collusion under asymmetric information (modeled as in Laffont and Martimort), we show that the unique regulator is not able to benefit from asymmetries of information within the coalition if she offers contracts that induce truthful revelation of her firm's cost. Collusion entails large departures from the full information allocation (bunching may appear) casting some doubt on the optimality of collusion-proof mechanisms. When firms are regulated each by a different body, the lack of coordination between regulators to fight collusion still entails costs.