We study the welfare impact of enforcing a competitive behavior from an unregulated fringe competing with a regulated dominant operator with imperfectly differentiated goods. The fringe is potentially collusive but may be supervised by a competition authority. We show that the...

Regulators often do not regulate all firms competing in a given sector. Due to product substitutability, unregulated competitors have incentives to bribe regulated firms to have them overstate their costs and produce less, thereby softening competition. The best collusion-proof contract entails...