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Yardstick Competition, Franchise Bidding and Firms’ Incentives to Collude

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  • Eshien Chong
  • Freddy Huet

Abstract

Collusion seems to be a pervasive problem when regional monopoly rights are auctioned to private firms. This leads us to study whether firms may collude if the regulator uses yardstick competition to simulate competitive forces, and how this is affected when both schemes are used. Using an infinitely repeated game framework, we find that collusion is sustainable when firms are sufficiently patient under yardstick competition. An additional franchise bidding mechanism can even help firms sustain collusion when they are impatient. When temporary monopoly rights are assigned for sufficiently long periods of time, collusion may not be sustainable even when firms are patient.
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  • Eshien Chong & Freddy Huet, 2009. "Yardstick Competition, Franchise Bidding and Firms’ Incentives to Collude," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 35(1), pages 149-169, September.
    • Handle: RePEc:kap:revind:v:35:y:2009:i:1:p:149-169
    DOI: 10.1007/s11151-009-9222-3
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    2. Miraldo, M & Crea, G & Longo, R & Street, A, 2014. "Collusion in regulated pluralistic markets," Working Papers 15402, Imperial College, London, Imperial College Business School.
    3. Klênio de Souza Barbosa & Pierre C. Boyer, 2011. "Competition for Local Public Services with Learning-by-doing and Transferability," Working Papers 06-2011, Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto.
    4. Harada, Shumpei & 原田, 峻平 & Yamauchi, Hirotaka & 山内, 弘隆, 2014. "Yardstick Competition And Franchise Bidding: A Comparative Analysis Based On Asymmetric Information," Hitotsubashi Journal of commerce and management, Hitotsubashi University, vol. 48(1), pages 31-42, October.
    5. Jonas Teusch, 2019. "When Efficient Firms Flock Together: Merger Incentives Under Yardstick Competition," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 55(2), pages 237-255, September.
    6. Harada, Shumpei & Yamauchi, Hirotaka, 2018. "A theoretical study on yardstick competition and franchise bidding based on a dynamic model," Transport Policy, Elsevier, vol. 62(C), pages 58-62.
    7. Eshien Chong & Freddy Huet, 2006. "Enchères, concurrence par comparaison et collusion," Revue économique, Presses de Sciences-Po, vol. 57(3), pages 583-592.
    8. Pereira, Miguel Alves & Marques, Rui Cunha, 2022. "Is sunshine regulation the new prescription to brighten up public hospitals in Portugal?," Socio-Economic Planning Sciences, Elsevier, vol. 84(C).

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    More about this item

    Keywords

    Collusion; Franchise bidding; Local public services; Yardstick competition; D42; D44; L50; L51;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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