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.