Horizontal Collusion and Innovation

Abstract

Not without reason, collusion among horizontal competitors (a horizontal price cartel) has long been the leading bete noire of monopoly policy. Collusion is perhaps the most direct means to undermine competition, with all its vaunted benefits. In particular, it is generally agreed that coordination by rivals of their prices and outputs damages the general welfare, and some of the severest strictures of the anti-trust laws have been directed against it. Yet, recent analysis has abandoned undeviating condemnation of horizontal collaboration and suggested that there are arenas in which it can be beneficial and sometimes even make a critical contribution to social well-being (see Katz and Ordover [i99O] for a discussion and further references). The dividing line seems to be that between static and intertemporal efficiency. Despite its tendency to yield a less-than-optimal allocation of resources in stationary equilibrium, collusion may speed productivity and output growth and even reduce the cost of the growth process. But even if it can do so, it does not follow that it always will. After a brief review of the familiar static-efficiency analysis stressing a few less obvious points, some of the associated policy issues will be skimmed with similar brevity. The bulk of the discussion will deal with collusion in innovation and its dissemination. Here the literature is hardly unanimous, but four conclusions do seem to emerge: first, that the ceteris paribus effects of dissemination are unambiguously beneficial; second that horizontal collusion will sometimes stimulate RD third, that even if it restrains innovation, the net consequence for growth and welfare can be beneficial because of cost saving and enhanced rapidity of dissemination; and, finally, that a clear peril of technology collusion is that it can be perverted into monopolistic agreement to keep prices high and even to avoid the expense and turmoil of rapid innovation.