Abstract
Competing firms can increase profits by setting prices collectively, imposing significant costs on consumers. Such groups of firms are known as cartels and because this behavior is illegal, their operations are secretive and difficult to detect. Cartels feel a significant internal obstacle: members feel short-run incentives to cheat. Here we present a network-based framework to detect potential cartels in bidding markets based on the idea that the chance a group of firms can overcome this obstacle and sustain cooperation depends on the patterns of its interactions. We create a network of firms based on their co-bidding behavior, detect interacting groups, and measure their cohesion and exclusivity, two group-level features of their collective behavior. Applied to a market for school milk, our method detects a known cartel and calculates that it has high cohesion and exclusivity. In a comprehensive set of nearly 150,000 public contracts awarded by the Republic of Georgia from 2011 to 2016, detected groups with high cohesion and exclusivity are significantly more likely to display traditional markers of cartel behavior. We replicate this relationship between group topology and the emergence of cooperation in a simulation model. Our method presents a scalable, unsupervised method to find groups of firms in bidding markets ideally positioned to form lasting cartels.
Highlights
Competing firms can increase profits by setting prices collectively, imposing significant costs on consumers
In this paper we propose a novel approach to the issue of detecting cartels in the specific context of public auction markets using network methods, built on the idea that the network of firm-firm interactions can reveal hot-spots in which cooperation is easier to sustain
Bottom-up algorithm to detect overlapping groups of interacting nodes, we find that groups with cohesive and exclusive interactions have higher prices, are less likely to sue each other, and are more likely to have low variance in their bids and prices - classic screens for cartel behavior used by competition authorities around the world[38]
Summary
Competing firms can increase profits by setting prices collectively, imposing significant costs on consumers Such groups of firms are known as cartels and because this behavior is illegal, their operations are secretive and difficult to detect. Groups of firms in these distinguished positions interact repeatedly and exclusively among themselves, creating ideal conditions to overcome the internal collective action problem and to engage in bid-rigging, a common form of anti-competitive behavior in these markets. For example coordination is easier in a smaller group with homogeneous firm sizes[8], while frequency of interaction facilitates punishment of defectors, and high costs to entry insulate the cartel from outsiders[9] Another perspective on collusion is to consider that firms are playing a repeated prisoner’s dilemma (PD) game[10]. In the PD and many other games in which collectively optimal actions are personally costly to players, altruistic cooperation emerges under a variety of conditions through mechanisms such as reciprocity and the altruistic punishment of defectors or cheaters[14]
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