Collusion Flashcards
What is collusion?
firm conduct intended to coordinate the actions of firms - Church & Ware
“firms… avoid competing with one another” - Belleflame and Peitz
“firms’ prices are higher than some competitive benchmark” - Motta
What policies exist to prevent this? (2)
Article 101 prohibits cartels (explicit collusion)
Merger Control prevents coordinated effects (increased likelihood of tacit collusion)
What are the two conditions needed for a cartel?
Deviations must be detected: either observed or inferred
After a deviation, punishment must follow
Why did the Danish Competition Council want to promote market transparency?
In order to increase price sensitivity of consumers to intensify competition
Lowdown of the Danish Ready mixed concrete market
Sellers offered individualised and confidential discounts to buyers
In 1993, DCC collected firm-specific prices for 18 production sites in 3 regions
Published list price, average prices, average of 5 lowest prices (3 month delay)
Within a year the prices had risen 15-20% and price differences had disappeared
Why wasn’t this simply a result of competition?
- There was no substantial increase in demand or input prices
- Inflation was only 1-2% over the period
- No increase in prices in other regions
Was the policy a success?
No, it provided firms with a way of coordinating prices and detecting deviations
This policy was abandoned in 1997
When is a collusive price sustainable in an infinitely repeated game? (2)
When punishment is harsh enough
-When punishment is credible
Grim Trigger strategy
Cooperate until opponent defect, then defect forever
What are the profits in collusion?
Collusive profits: π(c) if all firms set price p(c)
Deviation profits: π(d) if all firms set price p(d)
Punishment profits: π(n) if all firms set price p(n)
where π(d)>π(c)>π(n)
what is the profit from setting p(c) in every period?
π(c)+[π(c)δ]/1-δ = π(c)/1-δ
what is the profit from deviating?
π(d) + [π(n)δ]/1-δ
What is the necessary ICC for a firm not to deviate?
π(c)/1-δ ≥ π(d) + [π(n)δ]/1-δ
How can this be interpreted?
δ is sufficiently large (i.e. firms are patient)
The long term punishment outweighs the short term benefit of deviation ([δ/1-δ][π(c)-π(n)] > π(d) - π(c)
What are the per-period profits of collusion?(collusion, deviation, punishment)
collusion: π(c)=π(m)/n if both firms set p(m)>c
deviation: π(d) ≈ π(m) > 0 if one set p(m)-ε
punishment: π(n) = (pn-c)q(pn)/n = 0 if both set p(n)=c
When is a collusive price between p(n) and p(m) sustainable?
when δ≥1-1/n
What are profits in an asymmetric oligopoly where A’s market share is s >= 0.5 and B’s market share is (1-s) <= 0.5? (collusive, deviation, punishment)
collusive: for A: π(c) = sπ(m) if both firms set p(m)>c for B: π(c) = (1-s)π(m) if both firms set p(m)>c
deviation: both firms: π(d)≈π(m)>0 if one firm set p(m)-ε
punishment: both firms: π(n) = 0 if both set p(n) = c
What can we conclude about collusion and symmetry?
Collusion is easier when firms are symmetric Firm A will not want to deviate as its market share becomes larger, but firm B will want to deviate as its market share becomes lower
What is firm A’s long term punishment in an asymmetric market?
[δ/1-δ][sπ(m)-0]
What is firm A’s short term benefit?
π(m)-sπ(m)
what is firm B’s long term punishment?
[δ/1-δ][(1-s)π(m)-0]
What is firm B’s short term benefit?
π(m) - (1-s)π(m)
What is the critical discount factor for A?
δ≥1-s
What is the critical discount factor for B?
δ≥s
When is a collusive price between pN and pm sustainable?
What are the 3 types of cartel according to Davies and Olczak (2010)?
- compatible with theory: a few large symmetric firms
- dominant firm: a very large firm (S1>50%) and a number of smaller firms (S2<20%)
- unconcentrated: many small firms (S1<40% and S2<30%) with large fringe
How do per-period profits change with product differentiation?
Collusive: π(c) = π(m)/n - independent of product diff
Deviation: π(d) = π(d)(k) < π(m) - decreasing in product differentiation
Punishment: π(n) = π(n)(k) > 0 - increasing in product differentiation
What is the incentive compatibility constraint?
[π(c)-π(n)(k)]δ/1-δ ≥ π(d)(k) - π(c)
What is the long-term punishment?
[π(c)-π(n)(k)]δ/1-δ
What is the short-term benefit?
π(d)(k) - π(c)
Why does product differentiation make punishment less harsh?
The Nash profits are higher, demand is less responsive so competition is less intense
Why does raising product differentiation create less incentive to deviate?
A lower price doesn’t attract as many customers as before
