Yardstick Competition, Franchise Bidding and Firms' Incentives to Collude

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 collusion 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.