Collusion in regulated pluralistic markets

We analyse incentives for cooperative behaviour when heterogeneous providers are faced with regulated prices under yardstick competition. 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 under yardstick competition regulation. Our results suggest that under the yardstick competition each provider’s choice of cooperative cost is decreasing in the degree of the other provider’s altruism, so a selfinterested provider will operate at a lower cost than an altruistic provider. The prospect of defection serves to moderate the chosen level of operating cost. More general results show that collusion is more stable in homogeneous than in heterogeneous markets; in markets served by purely altruistic providers there is no collusion on costs while in markets served by purely self-interested providers there is scope for collusion. Our analysis demonstrates that it is important to consider the composition of the market when designing yardstick competition arrangements.