Absence Of Collusion Research Articles

Combinable products, price discrimination, and collusion

We analyze the effect of different pricing schemes on the ability of horizontally differentiated firms to sustain collusion when customers are able to mix products to achieve a better match of their preferences. We compare the impacts on the likelihood of collusion and on consumer welfare from three pricing schemes: two-part tariffs, linear prices, and quantity-independent fixed fees. We find that a ban of either price component of the two-part tariff makes it more difficult to sustain collusion at profit-maximizing prices. We also find that whereas linear pricing is the most beneficial pricing schedule for customers in the absence of collusion, it is the most harmful pricing schedule for customers in the presence of collusion.

Detecting bid rigging in public auctions for procuring infrastructure projects: formulating the reference scenario for decision-making

Bid rigging is a fraudulent scheme in procurement auctions resulting in non-competitive bids awarded at prices above the competitive market. Bid rigging is a global problem that wastes public agencies’ resources and taxpayers’ money. While various methods and tools have been developed to detect bid rigging, it remains challenging for public agencies to identify what a competitive baseline auction looks like in the absence of collusion. Such a baseline is commonly known as a reference scenario, which involves analyzing the behavior of honest bids in previous auctions to determine if future bids could be collusive. Research on formulating reliable reference scenarios for bid rigging detection in the auctions of infrastructure projects has received limited attention. Hence, our paper analyses the key criteria required to develop a reference scenario for public agencies to detect bid rigging during an auction. Drawing on data from Brazilian public procurement and oversight agencies, a procedure for composing robust reference scenarios for detecting bid rigging in infrastructure first-priced auctions is presented and discussed. We then test our procedure’s generalizability using data from four countries (Australia, Brazil, Spain, and the United States) in two auction formats (i.e., capped and uncapped). A better understanding of the reference scenario formulation will allow public officials to increase the likelihood of detecting bid rigging when it exists and avoid flagging it as such when no collusive practices are involved.

Smuggling and Border Enforcement

AbstractThis article analyzes the efficacy of border enforcement against smuggling. We argue that walls, fences, patrols, and other efforts to secure porous borders can reduce smuggling, but only in the absence of collusion between smugglers and state agents at official border crossings. When such corruption occurs, border enforcement merely diverts smuggling flows without reducing their overall volume. We also identify the conditions under which corruption occurs and characterize border enforcement as a sorting mechanism that allows high-skilled smugglers to forge alternative border-crossing routes while deterring low-skilled smugglers or driving them to bribe local border agents. Combining a formal model and an archival case study of opium smuggling in Southeast Asia, we demonstrate that border enforcement has conditional effects on the routes and volumes of smuggling, depending on the nature of interactions between smugglers and border agents. By drawing attention to the technological and organizational aspects of smuggling, this article brings scholarship on criminal governance into the study of international relations, and contributes to debates on the effects of border enforcement and border politics more generally.

Financial oligopolies and parallel exclusion in the credit default swap markets

Motivated by a recent antitrust case in the credit default swap (CDS) market defined as “parallel exclusion”, we formulate an oligopoly model of simultaneous trading by dealers in the CDS and loan CDS (LCDS) markets. We show that in equilibrium it is optimal for incumbent dealers to take suitably designed opposite positions in the two markets. Limiting information to incumbents constitutes a barrier to entry and preserves the intermarket arbitrage profits even in the absence of collusion. We use all mature contract pairs and document very large and virtually riskless profits. Extensive empirical tests support our model over competing explanations.

Notions of Centralized and Decentralized Opacity in Linear Systems

We formulate notions of opacity for cyberphysical systems modeled as discrete-time linear time-invariant systems. A set of secret states is $k$-ISO with respect to a set of nonsecret states if, starting from these sets at time $0$, the outputs at time $k$ are indistinguishable to an adversarial observer. Necessary and sufficient conditions to ensure that a secret specification is $k$-ISO are established in terms of sets of reachable states. We also show how to adapt techniques for computing under-approximations and over-approximations of the set of reachable states of dynamical systems in order to soundly approximate k-ISO. Further, we provide a condition for output controllability, if $k$-ISO holds, and show that the converse holds under an additional assumption. We extend the theory of opacity for single-adversary systems to the case of multiple adversaries and develop several notions of decentralized opacity. We study the following scenarios: i) the presence or lack of a centralized coordinator, and ii) the presence or absence of collusion among adversaries. In the case of colluding adversaries, we derive a condition for nonopacity that depends on the structure of the directed graph representing the communication between adversaries. Finally, we relax the condition that the outputs be indistinguishable and define a notion of $\epsilon$-opacity, and also provide an extension to the case of nonlinear systems.

Optimal Regulation of Multinationals under Collusion

AbstractThis paper analyses the optimal collusion‐proof mechanism for the regulation of multinational firms (MNFs) in foreign direct investment (FDI) projects. There is a host country with a profitable investment opportunity. Either a multinational firm (MNF) or a local firm (LF) can undertake this project; nonetheless due to its firm‐specific advantage, and the MNF has the potential to create a larger surplus. The host government faces an informational constraint such that it cannot observe the extra surplus the MNF can generate. Using this set‐up, Karabay (2010) shows that employing foreign ownership restrictions to force a joint venture (JV) can help the host government to partially overcome its information disadvantage. In this paper, we extend Karabay (2010) by studying the host government's optimal regulatory policy when the MNF and the LF can collude. It turns out collusion imposes no cost on the host government and the expected welfare attained in the absence of collusion can still be secured under collusion.

Market concentration and persuasive advertising: a theoretical approach

This paper examines the structural relation between persuasive advertising intensity and market concentration. The interaction of advertising costs with the consumer’s willingness to pay shapes the way markets respond to changes in sunk cost structures. This adjustment may involve firm entry and exit or modifications in advertising levels. It is shown that a non-monotonic association between advertising intensity and concentration may emerge even in the absence of collusion, requiring as a necessary condition that the ratio of operational profits and advertising cost elasticities with respect to a measure of perceived quality be decreasing. This result is robust to changes in both exogenous and endogenous sunk cost parameters. A simple tool is also proposed to empirically assess the behavior of the elasticities ratio. Finally, the model describes how intertemporal general equilibrium mechanisms may skew or even reverse the advertising-concentration relation through scale effects.

Robustly Collusion-Proof Implementation

A contract with multiple agents may be susceptible to collusion. We show that agents' collusion imposes no cost in a large class of circumstances with risk neutral agents, including both uncorrelated and correlated types. In those circumstances, any payoff the principal can attain in the absence of collusion, including the second-best level, can be attained in the presence of collusion in a way robust to many aspects of collusion behavior. The collusion-proof implementation generalizes to a setting in which only a subset of agents may collude, provided that noncollusive agents' incentives can be protected via an ex post incentive compatible and ex post individually rational mechanism. Our collusion-proof implementation also sheds light on the extent to which hierarchical delegation of contracts can optimally respond to collusion.

Downsizing with labor sharing and collusion

In this paper we develop a model with adverse selection on the productive efficiency of workers in the private sector to analyze the downsizing problem in a public enterprise. Workers are distinguished by an inside productivity factor. Our result shows that reallocation of labor in the optimal downsizing mechanism depends on the comparative advantage of workers in public versus private production and on the size of asymmetric information. In particular, if information asymmetry is small, random downsizing mechanisms may become optimal. We also show that collusion between workers and the manager in charge of downsizing may induce more screening than in the absence of collusion if information asymmetry is large enough. Finally, we study how risk aversion of workers affects the optimal downsizing mechanism.

Tendering and Bidding for Access: A Regulator's Guide to Auctions

Tenders and traditional auctions are increasingly being used in regulation; as a consequence it is essential regulators have an understanding of the basics of auction theory. There is no simple prescription for the design of an auction or tender that will fit all situations; moreover, the costs from inappropriate auction and tender design can be high For example, while a second-price sealed bid auction is efficient in the absence of collusion, if participants can collude then such auction formats can result in very low revenue. Low revenue can also result with a second-price auction when there are few bidders and no reserve price.

Discriminatory tariffs and international negotiations

Recent research has highlighted the efficiency of the MFN principle within the GATT/WTO structure. This paper analyzes the exception made to MFN within Article XXIII that allows discriminatory punishment for deviations from the agreement. We argue that, in the absence of collusion, the MFN exception reduces the severity of punishment and thus lowers the level of cooperation that can be achieved by the agreement. However, discriminatory punishment may still be beneficial as we show that it reduces the problems associated with the potential for renegotiation during the punishment phase. Finally, we argue that our results are also applicable to the question of whether to use trade policy sanctions as a means of enforcing agreements covering domestic policies.

COLLUSION IN PROCUREMENT AUCTIONS: AN EXPERIMENTAL EXAMINATION

Experimental methods are used to examine the existence and detectability of collusion in environments that exhibit critical parallels to procurement auctions. We find that given the opportunity sellers often raise prices considerably. Moreover, noncollusive Nash equilibrium predictions are insufficient to dismiss “suspicious” behavior as innocuous: in an environment where identical prices are predicted in a noncollusive Nash equilibrium, common prices are observed only when sellers communicate. In a second environment designed to parallel construction procurement contracting, market rotations are observed both with and without collusion, but collusion can often be detected from the pattern of losing bids.

Transport, the strategic issue at stake for the future of natural gas in Europe: avoidance of hidden collusion and implementation of efficient pricing

Two main conditions must simultaneously be met for the European gas market to become a competitive market: 1) the absence of collusion among the various actors; 2) the setting of a fair and efficient tariff system for the gas pipelines. In order to evaluate the possibility of collusion among European operators, we give in the first part of the paper a picture of the different actors involved in the upstream segment and the transport-distribution one. We show in the second part that the regulators have to make two kinds of choices concerning the transport system pricing with TPA: 1) a choice concerning the type of control (price cap or cost plus); 2) a choice concerning the allocation of fixed costs between the capacity-booking charges and the actual transportation cost charges.

Determining damages from the operation of bidding rings: An analysis of the post-auction `knockout' sale

Members of a bidding ring often use a private sale among themselves, known as the knockout, to decide who will buy the object that the ring has secured. The difference between the price realized in this private sale and the price paid by the ring in the public auction is divided, on the basis of a linear sharing rule, among the ring members. These side-payments provide an incentive for the ring members to bid higher than they would have in an identical public auction. As a consequence, neither the realized price in the private sale nor the total payments of the winner are unbiased estimates of the price the item would have fetched in the public auction in the absence of collusion. This paper evaluates the extent of this overestimate in the independent private values case, for both first price and second price post-auction knockout sales. Bids are not independent of the sharing rule but transfers from the winning bidder are. Further, bidder payoffs are independent of both the auction format and the sharing rule. Finally, it is shown that the "overbidding" in the knockout sale is increasing with the dispersion of bidder valuations and is of significant empirical relevance. The results of this paper can be used to obtain an unbiased assessment of the damages inflicted on the seller.

Determining Damages from the operation of Bidding Rings: An Analysis of the Post-Auction 'Knockout' Sale

Members of a bidding ring often use a private sale among themselves, known as the knockout, to decide who will buy the object that the ring has secured. The difference between the price realized in this private sale and the price paid by the ring in the public auction is divided, on the basis of a linear sharing rule, among the ring members. These side-payments provide an incentive for the ring members to bid higher than they would have in an identical public auction. As a consequence, neither the realized price in the private sale nor the total payments of the winner are unbiased estimates of the price the item would have fetched in the public auction in the absence of collusion. This paper evaluates the extent of this overestimate in the independent private values case, for both first price and second price post-auction knockout sales. Bids are not independent of the sharing rule but transfers from the winning bidder are. Further, bidder payoffs are independent of both the auction format and the sharing rule. Finally, it is shown that the overbidding in the knockout sale is increasing with the dispersion of bidder valuations and is of significant empirical relevance. The results of this paper can be used to obtain an unbiased assessment of the damages inflicted on the seller.

Competitive pricing of information goods: Subscription pricing versus pay-per-use

We investigate the existence and implications of competitive equilibria when two firms offer the same electronic goods under different pricing policies. One charges a fixed subscription fee per period; the other charges on a per-use basis. Two models are examined when firms' marginal costs are negligible and they can revise prices periodically. Both show that competition often leads to ruinous price wars in the absence of collusion. However, stable pricing equilibria exist in special cases. The findings are robust even when customers are willing to pay a fixed-subscription premium.

Fixed fee versus unit pricing for information goods; competition, equilibria, and price wars

Information goods have negligible marginal costs, and this will create possibilities for novel distribution and pricing methods. The main concern of this paper is with pricing of goods that are likely to be consumed in large quantities by individuals. For example, will software continue to be sold at a fixed price for each unit, or will it be paid for on the basis of usage? There is substantial evidence both from observing marketplace evolution and from surveys that customers overwhelmingly prefer subscription pricing. It turns out that even if we ignore this factor, per-use pricing is not a clear winner, and therefore when the preference effect is taken into account, subscription pricing is likely to dominate. We model competitive pricing between two companies that supply essentially equivalent services (such as movies or word processing software). One company charges a fixed fee per unit, while the other charges on a per-use basis. Each is interested in maximizing its revenue. We consider instances of the models that have stable competitive equilibria between suppliers along with situations that are unstable and, in the absence of collusion, lead to ruinous price wars.

Collusive Intra-Industry Trade

This paper examines the phenomenon of intraindustry trade under the condition of firm collusion. It is shown that with homogeneous goods, no collusive intraindustry trade can occur. But if the products are differentiated, firms will achieve their joint monopoly profits by exporting to each other's market. Thus, the observation of the occurrence of intraindustry trade does not necessarily mean the absence of collusion. The paper further studies the properties of such collusive trade. Despite the fact that the firms are joint monopolists, collusive two-way trade is still welfare superior to autarky for the world. Collusive intraindustry trade is also more sustainable if the firms' production costs are more similar.

Competition in Interregional Taxation: The Case of Western Coal

Markets for many products are dominated by small group of states or countries with a natural advantage in the marketplace because of some initial endowment of resources, favorable climate, or location. The purpose of this paper is to explore how such markets involving a few political jurisdictions interact noncooperatively. We examine how such a market might be structured and operate and the extent of monopoly rent that can be extracted in the absence of collusion. We answer these questions for an empirically estimated model of western U.S. coal in which two states (Montana and Wyoming) dominate production. We demonstrate that in this market the amount of rent that can be extracted is greatly reduced through competition (relative to a cartel). Nevertheless, even with two producing states competing against each other, significant rents can be captured--significant enough to refute the contention that little rent can accrue without a cartel.

Sealed Bid Auctions and the Search for Better Information

by the quality of the information available to the players. In particular the analysis is designed to give some insight into the players' incentives to obtain an informational advantage over their competitors. Our interest lies mainly in understanding the economic structure of the problem, and analysing the interactions that occur among the players. We have, therefore, limited ourselves to the analysis of a model with quite restrictive assumptions. The advantage of proceeding in this manner is that it enables us to obtain interesting explicit results with only a limited amount of mathematical computations. The disadvantage is, of course, that it is unclear to what extent the results can be generalized. In the model analysed here it turns out that: (a) Aggregate expected profits of the bidders fall, as the quality of the information available to them increases. It is thus mainly the seller who gains, when all participants try to improve their information. This seems to be a quite general result, and has been derived under considerably less restrictive assumptions in Case (1979), Reece (1978) and Rothkopf (1969), among others. (b) Even in the absence of collusion, it may turn out that no bidder ever places a bid greater than or equal to the true value of the tract. While it can easily be seen that this result depends strongly on the specific assumptions of the model we analyse, it does illustrate that it will be very difficult to prove that the players of an auction game are acting collusively. (c) Each participant's bidding strategy will be affected by the quality of the information available to his competitors. When this interaction is taken into account, it turns out that an increase in the quality of the information available to any one of them may lead to a fall in his expected profits. This is the main novel result of the paper.