Bargaining and Collusion in a Regulatory Model

We consider the regulation of a monopolistic market when the prin-cipal delegates to a regulatory agency two tasks: the supervision of the rms unknown costs and the arrangement of a pricing mechanism. As usual, the agency may have an incentive to hide information from the principal to share the informative rent with the \u85rm. The novelty of this paper is that both the regulatory mechanism and the side con-tracting between the agency and the \u85rm are modelled as a bargaining process. This negotiation between the regulator and the monopoly induces a radical change in the extrapro\u85t from private information, which is now equal to the standard informational rent weighted by the agencys bargaining power. This in turn a¤ects the collusive stage, in particular the \u85rm has the greatest incentive to collude when fac-ing an agency with the same bargaining power. Then, we focus on the optimal organizational responses to the possibility of collusion. In our setting, where incompleteness of contracts prevents the design of a screening mechanism between the agencys types and thus Tiroles equivalence principle does not apply, we prove that the stronger the agency in the negotiation process, the greater the incentives for the principal to tolerate collusion in equilibrium