Collusion Flashcards
General Assumptions(oligopoly)
(Oligopoly Market)
- High Entry Barriers (abnormal profit possible)
-Few Firms (Strategic interaction)
-Products are homogenous
Conditions for Collusion
- Repeated interaction
- Collusive profits > Deviation + Punishment profits
- ^Depends on Discount Factor
Discount factor equation
(1/(1+r/f))h(1+g)
Where:
r= i.r (-)
f= frequency of interaction +
h= probability of game continuing +
g= growth rate (future demand) +
What is Tacit collusion?
Collusion where firms can observe eachothers actions
perfect substitutes at cost c which is constant
What is Grim-Trigger?
consists of a cooperation phase, a deviation and then a punishment phase.
coop= pm/2
deviate = profit of entire demand
nash equilibrium = producing at cost c for profit NE
why would a firm deviate?
Immediate gain vs punishment phase.
if profit of deviation and discounted profit NE > discounted profit of Cooperation
then deviate
why would collusion be sustained?
if the future matters, anything can happen
e.gif the profits of collusion ouweigh the profits earned from deviation and subsequent punishment phase
Secret Price cut?
like tacit collusion but unobservable actions, highly dependent on demand states
Explain the intuition behind price wars in booms and the concept of partial collusion
if current demand is high in a duopoly profits can be doubled if the firm cheats and steals entire demand. If firms collude they will want to lower the price so that the gains of cheating arent as tempting (when actions cant be observed)
in good demand state when firms are more incentivised to cheat, collusion in bad demand as future is important
example of airlines setting exceptionally low prices in summer and winter to cheat but collude more so in fall and spring when business slacks
Factors facillitating collusion? (non govermental)
discoount faactor and all determinants
mkt structure - demand/firm quantity
credibility of punishment
detection of deviation
govt factors facilitating collusion
- firms cannot give discount to a single customer without all having the same discount within a time period. should protect customers but incentivises firms to collude prices
order preference; permits brokers to send orders to dealers even if its not the best price - no incentive for dealers to undercut
OPEC and NASDAQ studies
OPEC - quantity collusion, prce high and quantity low when in good demand state and price low and quantity high in bad demand state since they share a common price for oil
NASDAQ- Dealers colluding to gain in spread profits, bertrand collusion
Multimarket deviations
DEviations far more profitable
punishment far more severe
take route pairs for airlines, deviations rippple across all markets
