Collusion

Question 1

What is collusion?

Answer 1

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

Question 2

What policies exist to prevent this? (2)

Answer 2

Article 101 prohibits cartels (explicit collusion)
Merger Control prevents coordinated effects (increased likelihood of tacit collusion)

Question 3

What are the two conditions needed for a cartel?

Answer 3

Deviations must be detected: either observed or inferred
After a deviation, punishment must follow

Question 4

Why did the Danish Competition Council want to promote market transparency?

Answer 4

In order to increase price sensitivity of consumers to intensify competition

Question 5

Lowdown of the Danish Ready mixed concrete market

Answer 5

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

Question 6

Why wasn’t this simply a result of competition?

Answer 6

• 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

Question 7

Was the policy a success?

Answer 7

No, it provided firms with a way of coordinating prices and detecting deviations
This policy was abandoned in 1997

Question 8

When is a collusive price sustainable in an infinitely repeated game? (2)

Answer 8

When punishment is harsh enough
-When punishment is credible

Question 9

Grim Trigger strategy

Answer 9

Cooperate until opponent defect, then defect forever

Question 10

What are the profits in collusion?

Answer 10

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)

Question 11

what is the profit from setting p(c) in every period?

Answer 11

π(c)+[π(c)δ]/1-δ = π(c)/1-δ

Question 12

what is the profit from deviating?

Answer 12

π(d) + [π(n)δ]/1-δ

Question 13

What is the necessary ICC for a firm not to deviate?

Answer 13

π(c)/1-δ ≥ π(d) + [π(n)δ]/1-δ

Question 14

How can this be interpreted?

Answer 14

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)

Question 15

What are the per-period profits of collusion?(collusion, deviation, punishment)

Answer 15

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) = (p_n-c)q(p_n)/n = 0 if both set p(n)=c

Question 16

When is a collusive price between p(n) and p(m) sustainable?

Answer 16

when δ≥1-1/n

Question 17

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)

Answer 17

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

Question 18

What can we conclude about collusion and symmetry?

Answer 18

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

Question 19

What is firm A’s long term punishment in an asymmetric market?

Answer 19

[δ/1-δ][sπ(m)-0]

Question 20

What is firm A’s short term benefit?

Answer 20

π(m)-sπ(m)

Question 21

what is firm B’s long term punishment?

Answer 21

[δ/1-δ][(1-s)π(m)-0]

Question 22

What is firm B’s short term benefit?

Answer 22

π(m) - (1-s)π(m)

Question 23

What is the critical discount factor for A?

Answer 23

δ≥1-s

Question 24

What is the critical discount factor for B?

Answer 24

δ≥s

Question 25

When is a collusive price between p^N and p^m sustainable?

Answer 25

Question 26

What are the 3 types of cartel according to Davies and Olczak (2010)?

Answer 26

• 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

Question 27

How do per-period profits change with product differentiation?

Answer 27

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

Question 28

What is the incentive compatibility constraint?

Answer 28

[π(c)-π(n)(k)]δ/1-δ ≥ π(d)(k) - π(c)

Question 29

What is the long-term punishment?

Answer 29

[π(c)-π(n)(k)]δ/1-δ

Question 30

What is the short-term benefit?

Answer 30

π(d)(k) - π(c)

Question 31

Why does product differentiation make punishment less harsh?

Answer 31

The Nash profits are higher, demand is less responsive so competition is less intense

Question 32

Why does raising product differentiation create less incentive to deviate?

Answer 32

A lower price doesn’t attract as many customers as before