Price regulation of pluralistic markets subject to provider collusion
We analyse incentives for collusive behaviour when heterogeneous providers are faced with regulated prices under two forms of yardstick competition, namely discriminatory and uniform schemes. Providers are heterogeneous in the degree to which their interests correspond to those of the regulator, with close correspondence labelled altruism. Deviation of interests may arise as a result of de-nationalisation or when private providers enter predominantly public markets. We assess how provider strategies and incentives to collude relate to provider characteristics and across different market structures. We differentiate between “pure” markets with either only self-interested providers or with only altruistic providers and “pluralistic” markets with a mix of provider type. We find that the incentive for collusion under a discriminatory scheme increases in the degree to which markets are self-interested whereas under a uniform scheme the likelihood increases in the degree of provider homogeneity. Providers’ choice of cost also depends on the yardstick scheme and market structure. In general, costs are higher under the uniform scheme, reflecting its weaker incentives. In a pluralistic market under the discriminatory scheme each provider’s choice of cost is decreasing in the degree of the other provider’s altruism, so a self-interested provider will operate at a lower cost than an altruistic provider. Under the uniform scheme providers always choose to operate at the same cost. The prospect of defection serves to moderate the chosen level of operating cost.
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