Question 1

How is collusion defined?

Accepted Answer

Hard to define... "firm conduct intended to coordinate the actions of firms" Church & Ware (p.308) "firms … avoid competing with one another" Belleflamme & Peitz (p.336) "firms' prices are higher than some competitive benchmark" Motta (p.138) It may entail: agreeing on price levels, allocating sales quotas, mutual forbearance (not entering each other's markets) … How is an agreement reached? Explicit collusion: secret communication – meetings, phone calls, emails Tacit collusion: no communication – an understanding develops over time one firm raises their price to signal that if they work together prices could be higher.

Question 2

Current Policy surrounding collusion?

Accepted Answer

Article 101: prohibits cartels (prohibits explicit collusion) easier to prove explicit collusion in a court of law (usually have some hard evidence) Harder to do for tacit collusion and could get in the way of a market functioning properly Merger control: prevents coordinated effects (increased likelihood of tacit collusion)

Question 3

Example of Tacit collusion?

Accepted Answer

a concrete example (Albæk et al, 1997) The Danish Competition Council (DCC): wanted to promote market transparencyWhy? Increase price sensitivity of consumers to intensify competition 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 prices, average prices, average of 5 lowest prices (3 month delay) --\> hoped this will lead prices to fall Within a year: prices ↑ by 15-20 per cent & price differences had disappeared Was it simply a result of competition? ● No substantial increase in demand or input prices ● Inflation was only by 1-2 per cent over the period ● No increase in prices in other regions where they hadn't increased the prices The policy provided firms with the means of coordinating prices & detecting deviations --\> tried to make prices transparent to consumers but also made them transparent to the firms themselves too Emphasis on promoting market transparency abandoned in 1997

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L6 - Collusion Flashcards

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