Collusion Flashcards
Strategic commitment, definition & conditions
Decisions that have long term impact and are hard to reverse . A strat; decision must be: Visible , understandable, and credible (irreversible).
Tactic moves.
Decisions that have short term impact and that can be easily reversible = more likely to be matched by rivals (e.g. cutting prices in specific items)
Explicit collusion - Cartels
- illegal and has s†ability as main issue
- Members are assumed to make decisions collectively (price fixing agreements)
Members are committed to long term minding agreements
Tacit collusion - Implicit
emerges as the outcome of firms executing their non cooperative strategies
Its main issue is sustainability
firms’ non cooperatives moves lead into a coordinated outcome.
When cartels are allowed in the EU
- When the agreements include firms with small market shares.
- When the agreements doesn’t include competitors.
- When the agreements have more positive than negative effects.
- When the agreements are critical t the improvements of the products/services provided.
- When the agreements are critical to product development or to the process of finding new ways of bettering the products’ availability to consumers.
Ho cartels function?
Cartel members eliminate competition by either reducing joint output or increasing prices .
I n many markets, not all seller side firms collude but only a subset of the firms.
What makes cartels unstable ?
Collusive behavior benefits also firms outside the cartel. Which motivates outsiders to tag along. The latter makes cartels highly unstable.
Tacit collusion dynamics?
Tacit collusion does not require any illegal agreements or even communications. Firms act unilaterally in responses to changes and actions of others in the market.
in which type of markets algorithmic is more likely to be used?
Algorithmic tacit collusion is more likely to be relied on in concentrated markets. Prices and competition actions’ deviations can be monitored and taken into account in the independent actions taken.
prisoner’s dilemma characters
- no communication or binding commitment
* one shot game - no room for punishments or reputation effect
cooperative behavior
allows pricing above competitive levels with no explicit agreements.
results in Pareto equilibrium when both are cooperative . it can never be achieved in a repeated game with finite number of rounds.
Nash equilibrium
Achieved when both parties are pricing at non cooperative levels (dominant strategies). It gives the unique outcome in a game with an finite number of rounds
Reputation effect
takes place when the game is repeated; however, if there are only two rounds, the may be cooperative in the first round and non.. at the second.
Infinite game
firms collude with no fear of being cheated on thanks to trigger strategies which are:
Tit for tat: forgiving, prices set a monopoly level but corrected to match any change.
Grim trigger: Non-forgiving, prices set at monopoly level, but corrected to match MC levels to match any changes but kept that way forever. (neither firm has an incentive to cheat on the collusive outcome.)
Does an equilibrium result where the firms charge the high price in each period?
given the pv of firm value, if a firm cheats and sells at a lower price, it PV will be lower. Hence the equilibrium is when at when both firms sell at the higher price ( to gain a higher PV ).
What is the main requisite to achieve a collusive outcome?
• In an infinite repeated game a collusive outcome can emerge as the equilibrium in an oligopoly.
• In order to achieve this outcome firms must solve a coordination problem.
• However, coordination without explicit agreements or communication is very difficult.
In order to have a collusive outcome we must have a strategy (like the grim strategy) that works as a Focal Point:
each firm expects that all rivals will follow that strategy.
Factors that facilitate Collusion
Frequent communication and alignment
Great probability of continuation and industry growth
Within industries with fewer and similar players
Competing in several markets
Punishment mechanisms
factors that ease achieving cooperative pricing
factors related to market structure such as:
- Concentration
- Conditions that affect reaction speeds and detection lags
- Asymmetries among firms
- Price sensitivity of buyers
Practices that Facilitate Cooperative Pricing
Firms can facilitate cooperative pricing by
• Price leadership :
• The price leader in the industry announces price changes ahead of others and others match the leader’s price
• The system of price leadership can break down if the leader does not retaliate if one of the follower firms defects
• Most favored customer clauses
Practices that Facilitate Cooperative Pricing
Firms can facilitate cooperative pricing by
• Price leadership :
• The price leader in the industry announces price changes ahead of others and others match the leader’s price
• The system of price leadership can break down if the leader does not retaliate if one of the follower firms defects
• Most favored customer clauses:
• Most favored customer clause allows the buyer to pay the lowest price charged by the seller
• While this clause appears to benefit the buyer (a price cut to any one customer lowers the price for the most favored customer) it also inhibits price competition
Tacit collusion or competitive pressure?
For a regulator it is difficult to distinguish tacit collusion from competitive pressure.
• Price-matching: promise not to be undersold and match competitor’s lower price
• Price-beating: promise to have the lowest price in the market
