Collusion-proof under yardstick competition: A discriminatory scheme

An important limitation of yardstick competition is due to its susceptibility to collusive manipulation. The degree which the regulated firms manage to conspire is affected by the particulars of the scheme. The incentives for collusion among firms when an industry is regulated by means of yardstick competition are analysed in a Principal-Agent framework, and we propose the optimal collusion-proof contract is to introduce a ¿discriminatory scheme¿ in the sense that it can improve the efficiency of yardstick competition by developing interest conflict among the regulated firms.