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Economics Research International
Volume 2012 (2012), Article ID 818716, 17 pages
http://dx.doi.org/10.1155/2012/818716
Research Article

Incomplete Regulation, Asymmetric Information, and Collusion-Proofness

Faculdade de Economia do Porto, Rua Dr. Roberto Frias, 4200-464 Porto, Portugal

Received 27 May 2011; Revised 2 October 2011; Accepted 3 October 2011

Academic Editor: David E. Giles

Copyright © 2012 Marco Meireles and Paula Sarmento. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

In an incomplete regulation framework, the regulator cannot replicate all the possible outcomes by himself since he has no influence over some firms in the market. Due to asymmetric information, it may be better for the regulator to allow the unregulated firms to extract a truthful report from the regulated firm through side-payments under collusion, and therefore the “collusion-proofness principle” may not hold. In fact, by introducing an exogenous number of unregulated firms, social welfare differences seem to favour a collusion-allowing equilibrium. However, such result will depend on the relative importance given by the regulator to the consumer surplus in the social welfare function.