The Subsidiarity Bias in Regulation

We study the choice of the regulatory structure when a regulated firm engages in different activities for different countries. Under decentralization each activity is regulated independently and the contracts offered to the firm suffer from two oppos- ite distortions with respect to centralization: the competition between regulatory authorities forces them to offer too high-powered incentive contracts; however, be- cause the ownership structure of the firm is dispersed across the countries, each regulator does not fully internalize the effect of his regulation on the firm's rent and contracts tend to be too low-powered. When the activities of the firm are suf- ficiently substitutable we show that decentralization always leads to an inefficient drift of the regulatory contracts towards fixed-price contracts. Nonetheless, when regulators have private agendas and possess the discretion to distort their policy to gain the support of some interest groups, then decentralization of the regulat- ory powers may be preferred to centralization as competition between regulatory authorities eradicates their discretionary power.incentives, decentralization, regulation.

Competition, incomplete discrimination and versioning

Two producers offer differentiated goods to a representative consumer. The buyer has distinct marginal valuations for the quality of the products. Each producer perfectly knows the consumer's taste for its own product, but remains uninformed about its taste for the rival's product. When each product cannot be purchased in isolation of the other one, a phenomenon of endogenous preferences arises since a firm's offer to the consumer depends on the information unknown by the rival firm. Multiple equilibria emerge and the consumer's rent increases with his valuation for one product and decreases with the valuation for the other product. This provides some foundations for the phenomenon of versioning which has been observed in some digital goods markets. By contrast, when each product can be purchased in isolation of the other one, at the unique equilibrium consumers with larger valuations for a product earn higher rents. The analysis is undertaken under two alternative pricing policies: in the partially-discriminatory case, producers make use of the known information only; in the fully-discriminatory case, each producer offers second-degree price discriminates the consumer according to the unknown information. We show that, sometimes, firms prefer partial to full discrimination to soften competition

Partial Yardstick Regulation and Collusion

Entrants may provide information to a regulator, even when they cannot be regulated. With correlated costs, yardstick-like regulatory contracts based on the output of unregulated firms nullify information rents. But they give strong incentives to the regulated incumbent to bribe competitors. A regulated Stackelberg leader and an unregulated follower have correlated costs and may collude. We show that, although regulation is partial, collusion-proofness can still be obtained, but is more costly. When offering collusion-proof contracts, the regulator cannot benefit from the asymmetric information between firms, contrary to the complete regulation case. Moreover, the regulator cannot use the information provided by the competitor's behavior to obtain efficiency.ou

Strategic choice of financing systems in regulated and interconnected industries

The growing importance of inter-network exchanges in infrastructure-based utilities influences regulatory choices and access pricing for downstream services using the infrastructures. We analyze this problem in a setting where the infrastructure managers of two bordering countries are in charge of pricing the access to their networks. The infrastructures are used by downstream firms to provide international services that link the two countries. Network costs can be financed either through a subsidy or solely through user charges. We first characterize the strategic interaction between infrastructure managers and show that it is affected by the regulatory modes adopted in the two countries. Then, we determine the equilibrium non-cooperative choice of a financing system. As opposed to the perfect cooperation benchmark, in which subsidizing the infrastructures is socially desirable, the commitment to strict budget-balance in both countries becomes socially preferable since this alleviates the externalities generated by non-coordination between access pricing decisions

Antitrust enforcement policy and markets interaction: targeted or concerted interventions?

We study the design of antitrust intervention policy in presence of horizontally imperfectly differentiated industries. Firms in a given industry may decide to collude, but inter-industry collusion is assumed not to be possible. We find that the enforcement policy depends critically on the nature of the differentation and of the competition between industries. With substitutes, the intervention policy should be targeted when firms are Cournot competitors. Indeed, in this case, enforcing a competitive behavior from one industry has a positive spill-over on the incentive to collude in the other industry: the stronger the substitutability, the more targeted the intervention. However, with Bertrand competition and sufficiently homogenous products, even two collusive industries make almost no profits. In this case, we show that the intervention is concerted across industries and decreases with the substitutability between products. By contrast, with complements, these probabilities must be equal across markets since enforcing a competitive behavior in one industry reinforces the other industry's incentive to collude. This result carries over to the situation of vertically linked industries where outputs are technological complements. For sufficiently large degrees of complementarity, the antitrust authority is forced to intervene with probability one in both markets. These results do no longer depend on the nature of the competition

Regulatory Competition in Network Interconnection Pricing

This paper covers network investment problems under decentralized control of regulation, infrastructure ownership and management. The model features two countries managing domestic infrastructures, used simultaneously for downstream international service provision. Initially, the welfare losses from non-cooperative investment financing policy and access pricing are derived. The impact of strategic interaction between the countries' access prices on the choice of financing policy is investigated. Under strict budget balancing, there are no incentives for efficiency improving investments. Further, investment coordination is shown useless in the absence of regulatory coordination. Illustrations from European network regulation policy for energy and rail are presented