Industrial economics collusion slides.ppt

Industrial economics slides

1. © 2016. Cavendish University. Rights
Reserved
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© 2019. Cavendish University. Private and Confidential
5/29/2024
Collusion

2. Introduction
•Collusion is the act of conspiring to increase the
benefits of entities that come together to form a
cartel by putting anti-competitive measures in
place.
•collusion is most likely to take place when there
are few (i.e. 4 or less) firms in an industry rather
than when there are many.
•Cartels and market separating agreements are
illegal, they indicate an abuse of a dominant
position. Capitalist societies are greatly negatively
impacted by such practices.

3. Types of collusion
Explicit collusion
which is a formal agreement to set anticompetitive
measures. There is a direct association among the
members in the cartel.
Tacit collusion
Firms collude without formally agreeing to do so.
One of the ways it can be done is through price
leadership.

4. THE FOLK THEOREM
To begin with, any trigger strategy is rooted in the
assumptions that cheating on the cartel agreement is
detected quickly and that punishment is swift. If instead
detection and punishment of cheaters takes time then
sustaining the cartel becomes more difficult because it
allows the defecting firm to enjoy the gains for more periods
and this raises the incentive to defect.
An example suppose that market demand fluctuates within
some known bounds and that the cartel has agreed to set a
price or has agreed to production quotas that lead to that
market price.
In this setting a cartel firm that observes a decline in its sales
cannot tell whether this reduction is due to cheating by one

5. THE FOLK THEOREM
of its partners or to an unanticipated reduction in demand.
The folk theorem tells us that some collusion is always a
possibility subjects to two qualifications first the probabilistic
factor must be sufficiently close to unity, secondly while
collusions maybe possible the profits resulting from it may
not be very large relative to the noncooperative outcome.
•The theorem suppose that an infinitely repeated games
has a set of payoffs that exceed the one-short Nash
equilibrium payoffs for each and every firm. Then any set
of feasible payoffs that are preferred by all firms to the
Nash equilibrium payoffs can be supported as subgame
perfect equilibria for the repeated game or for some
discount rate sufficiently lose unity.

6. FACTORS FACILITATING COLLUSION
•Concentrated market/small: number of firms we are likely
to find collusion in more concentrated market for at least
two reasons first increased, increased concentration
typically reduces the critical probability adjusted discount,
•Significantly Entry Barriers: easy entry undermines
collusions because one of two things must happen when a
new firm enters a cartelized market.
•Frequent and regular orders :also facilitates an industry in
which firms receive infrequent orders will not be one of
the conducive to price-fixing.

7. FACTORS FACILITATING COLLUSION
•Concentrated market/small: number of firms we are likely
to find collusion in more concentrated market for at least
two reasons first increased, increased concentration
typically reduces the critical probability adjusted discount,
•Rapid Market Growth: If market is expected to grow over
time, deviation “early” in the market’s growth generates
profits as usual but now runs the risk of sacrificing the
larger profits that the cartel will generate as the market
grows. And vise versa, if the market is expected to decline
over time. In this case, there is a stronger temptation to
cheat and get out now while the gains from doing so are
reasonably good.

8. FACTORS FACILITATING COLLUSION
•Technological or Cost Symmetry: When two firms have
different costs it will be more difficult to formulate a
collusive agreement that they both find satisfactory.
Detailed negotiations over prices and market shares are
much more straightforward. when firms are similar.
•Product homogeneity: collusion is easier to sustain when
the cartel members produce homogeneous or nearly
homogeneous products.
•Multi-Market Contact: competing against the same set of
rivals in many markets. the colluding firms have
asymmetric market shares in the different markets in
which they compete which may facilitate collusion.

9. Collusions: the role of antitrust policies
•The main role of antitrust policy is to prevent collusion
from happening in the first place instead of trying to
remedy collusive activity after it has happened. They
promote robust competition, limit market power and
protect consumers from anti-competitive practices in the
market.
•If collusive agreements are to be limited authorities have
to take explicit action in order to enforce prohibition of
anti-competitive agreements. There are two main tools
authorities can use to prohibit price fixing agreements;

10. a.Detection
•stricter enforcement through closer monitoring increases
the probability of uncovering a cartel and a successful
prosecution.
b.Penalty Fees
•rather than disburse resources to increase the likelihood of
uncovering cartels, the authorities can instead raise the
penalty fee paid by guilty conspirators that have been
caught and brought to justice.
•However in reality it may be that the probability of
detection itself depends on how aggressively the cartel
Collusions: the role of antitrust policies

11. Collusions: the role of antitrust policies
•pursues monopoly profits. Hence firms will have to set
their price reasonably below that of a pure monopoly and
yet still above the noncooperative price in the market.
Setting a penalty fee that as close as possible to the
collusive profits can induce cartels to collude at a lower
price which can reduce the harm from collusion should any
occur.

12. Problems with detection of collusion
•detection means legally proving that a collusive agreement
existed. most detection is the result of complaints by
customers and, increasingly, by one member of the cartel
telling on its partners so as to escape or limit its own
prosecution or by unhappy competitors.
•The problem with detection by antitrust authorities is that
they don’t have true information about the nature of
market demand and production and transportation cost as
much as the cartels do.
•Indistinguishability Theorem. When there is a problem
with identification in the measurement of deviation from
perfectly competitive behavior by comparing two different
equilibria illustrated in price strategies.

13. THE PRISONER’S DILEMMA, REPEATED
GAMES
•In a cartel there are extra profits to be earned if each firm
cooperates and holds production off the market to
approximate more closely the monopoly outcome.
•However each firm’s best response is always to defect from
the agreement even if the rival continues to keep to it.
•These situations are in fact examples of many games in
which players share possibilities for mutual gain that
cannot be realized because of a conflict of interest.
•The prisoners dilemma posits to be a major problem for
cartels, because the members are usually incentivized to
cheat despite them potentially yielding the highest reward
when they choose to cooperate.

14. THE PRISONER’S DILEMMA, REPEATED
GAMES
•cartel cooperation is not “natural” despite the large
potential profit that it can bring because cooperation is not
a Nash equilibrium for either firm.
•Collusion between the two firms to produces the
monopoly output is unsustainable in that it is not a Nash
equilibrium to the single period game.

15. Types of mergers
•Horizontal Mergers; are combinations of firms that are
rivals within the same industry.
•Vertical Mergers; involves the merging of companies
operating at different stages of production in the same
product line.
•Conglomerate Mergers; a merger of two firms that have
little or no common markets or products.

16. Example
•1. Suppose that two firms compete in quantities (Cournot)
in a market in which demand is described by: P = 260–2Q.
Each firm incurs no fixed cost but has a marginal cost of 20.
a. What is the one-period Nash equilibrium market price?
What is the output and profit of each firm in this
equilibrium?
b. What is the output of each firm if they collude to produce
the monopoly output? What profit does each firm earn with
such collusion?

17. Example 2
•For collusion of three firms in an oligopoly market where
p=100-2Q, Q=q1+q2+q3 and the MC=20, solve direct by
finding the TR, MR and find the output like the output and
find the price.

18. ID NUMBERS
•094-331
•094-283

19. © 2016. Cavendish University. Rights
Reserved
18
© 2019. Cavendish University. Private and Confidential7/23/2017
5/29/2024