Collusive Agreements Research Articles

Product differentiation, price discrimination and collusion

The existing literature which analyses the relationship between the product differentiation degree and the sustainability of a collusive agreement on price assumes that firms cannot price discriminate, and concludes that there is a negative relationship between the product differentiation degree and the critical discount factor. This paper, in contrast, assumes that firms are able to price discriminate. Within the Hotelling framework, three different collusive schemes are studied: perfect collusion on discriminatory prices; perfect collusion on a uniform price; collusion not to discriminate. We obtain that the critical discount factor of the first and the third collusive scheme does not depend on the product differentiation degree, while the critical discount factor of the second collusive scheme depends positively on the product differentiation degree. Moreover, we show that imperfect collusion is more difficult to sustain than perfect collusion.

Managers Compensation and Collusive Behaviour under Cournot Oligopoly

The aim of the present paper is to show that the existence of a concrete outside option for firms' executives can induce, under specific circumstances, every firm to adopt restrictive output practices. In particular, the paper characterizes the conditions for which, under Cournot oligopoly, existing firms behave more collusively than in a standard Cournot model. It is also shown that room exists for perfect and stable collusive agreements amongst firms. Other interesting findings are also twofold. Firstly, that the equilibrium executives' pay will usually be dependent upon the number of companies initially disposing of the technology and/or of the organizational knowledge required to set up the business. Secondly, that companies' procedures difficult to duplicate can constitute a beneficial form of competition policy in that they induce the firms to behave less collusively in the product market.

Strategic Considerations in the Emergence of Private Action Rights

The design of mechanisms for the enforcement of rules regarding anticompetitive practices has been the subject of considerable controversy in both developed and developing countries. Public competition authorities have advantages in terms of scale economies and coordination of competing policy objectives. Private rights of action enhance the capacity of legal regimes to generate information and deter collusive agreements and exclusionary practices. Private enforcement also increases the transaction costs of regulatory capture. Given these differences, mixed regimes are likely to be superior to purely public or private arrangements. However, most national jurisdictions grant exclusive authority to public agencies and prosecutors. This article explores the puzzling resistance to the development of mixed competition enforcement regimes by studying recent attempts in the European Union (EU) to enhance private rights of access. The analysis suggests that decentralization of enforcement rights limits the capacity of a government to employ competition rules as an instrument of strategic trade policy. Evidence from EU illustrates that tensions between domestic and international policy considerations can generate distinctive paths of procedural development.

Internal decision-making rules and collusion

We study the impact of internal decision-making structures on the stability of collusive agreements. To this end, we use a three-firm spatial competition model where two firms belong to the same holding company. The holding company can decide to set prices itself or to delegate this decision to its local units. It is shown that when transportation costs are high, collusion is more stable under delegation. Furthermore, collusion with maximum prices is more profitable if price setting is delegated to the local units. Profitability is reversed for low discount factors.

Harmonization of Corporate Tax Systems and Its Effect on Collusive Behavior

AbstractWe study how harmonization of corporate tax systems affects the stability of international cartels. We show that tax base harmonization reinforces collusive agreements, while harmonization of corporate tax rates may destabilize or stabilize cartels. We also find that bilateral and full harmonization to a common standard is worse from society's point of view than unilateral harmonization to a minimum tax standard.

Decentralization, Transfer Pricing, and Tacit Collusion*

Research in accounting traditionally regards transfer pricing as an intra-firm transaction problem. Within the context of a simple Cournot model, we demonstrate that firms can use transfer prices strategically as a collusive device. While firms are individually better off from a centralized organizational form with each internal division transferring intermediate goods at marginal cost, all firms benefit from a collusive agreement to organize along profit centers, transferring goods above marginal cost. This collusion yields roughly twice the competitive profits and is sustainable even when collusion on quantities is not. This practice may also escape legal scrutiny, even though the same cost shifting between regulated monopolists and their corporate affiliates is regarded as a major concern for regulators and researchers.

Hidden Surcharges and Tacit Collusion: A Simple Model

This paper describes how firms can use hidden surcharges to make tacit collusion easier, in a very simple Bertrand-type competition model with brand loyalty. The firms choose advertised price, and hidden surcharge; the surcharges are unavoidable (such as fuel surcharges added to the ticket price). Advertised prices are observed by everyone; surcharges are observed by competitors and some consumers; consumers make their choice based on the information observable to them. We demonstrate that when market players specify punishment for defecting on the collusive agreement in such a way that undercutting the rival's surcharge rather than advertised price becomes the optimal defection strategy; sustaining the tacitly collusive agreement becomes an easier task. We also show how hidden surcharges can originate within our model's framework as firms' response to an exogenous cost shock, even when most consumers are aware of these hidden fees.

Excluding Ringleaders from Leniency Programs

We analyze the impact of ringleader discrimination in leniency programs on the sustainability of collusion. An important role of leniency is to elicit cartel members’ evidence about collusive activity in order to increase the probability of convicting the cartel. We find that ringleader discrimination does not play a role when the ringleader’s relative amount of evidence is high as the collusive agreement will specify and compensate the ringleader to never blow the whistle in any case whereas ringleader discrimination has a pro-collusive (deterring) effect when the ringleader’s relative evidence is moderate (low). Furthermore, ringleader discrimination may deter collusion if the investigation probability of the antitrust authority is sufficiently high but not too high. In this case, the effect of asymmetry from exclusion — even if profits are redistributed — is stronger than the loss of ringleader evidence for conviction.

Competition Law and the Economy in the Russian Federation, 1990-2006

Abstract Most developing and transition countries adopted statutes prohibiting anticompetitive agreements and abusive practices during the 1980's and 1990's. The effectiveness of these laws is nevertheless widely debated. This paper contributes to the literature by conducting an event study of the adoption of Russian competition laws in the early years of transition, the subsequent economic developments and the legislative reform process of 2002-2006. An examination of the substantive prohibitions and enforcement data reveals that Russian competition laws relied on complex standards and imposed weak constraints on anticompetitive practices. The more recent shift to simpler and more predictable per se prohibitions against collusive agreements substantiates this hypothesis. The evidence has implications for the design of regulatory regimes in other countries with laws similar to those operative in Russia during the transition process.

Second-Hand Markets and Collusion by Manufacturers of Semidurable Goods

I show that when oligopolistic firms manufacture semidurable goods, second-hand\par markets can play a key role in supporting collusive behavior. This in spite of the fact\par that a monopolist manufacturer has an incentive to eliminate second-hand markets \endash\par a point made by a number of authors. The idea that second-hand markets facilitate\par collusion is supported by the many examples in which manufacturers strengthen secondhands\par markets, e.g. by providing warranty coverage across owners, or by encouraging\par dealers to accept trade-ins. The intuition is that the prospect of obtaining a high\par price in a second-hand market increases the demand for new goods. This means that\par the expectation of a price war unleashed by the violation of a collusive agreement will\par decrease not only the future prices of the new and used goods but also the current price\par of the new good, thus making the defection itself less profitable. In this framework,\par I analyze the role of leasing policies, buyback policies and warranty coverage for used\par units.

Sustaining Collusion in Growing Markets

The impact of demand growth on the collusion possibilities is investigated in a Cournot supergame where market growth may trigger future entry and the collusive agreement is enforced by the most profitable ‘grim trigger strategies’ available. It is shown that even in situations where perfect collusion can be sustained after entry, coping with a potential entrant in a market which is growing over time may completely undermine any pre‐entry collusive plans of the incumbent firms. This is because, before entry, a deviation and the following punishment phase may become more attractive thanks to their additional effect in terms of delaying entry.

Collusion in the Private Health Insurance Market: Empirical Evidence for Chile

In September 2005, the Chilean Competition Authority filed a lawsuit against the 5 largest private health insurance providers for violation of antitrust laws, specifically accusing them of collusion in the coverage of the plans offered to consumers between March 2002 and March 2003. In fact, during that period these 5 providers reduced the coverage offered from 100% for hospitalization and 80% for ambulatory care to 90% and 70% respectively. As usual the observation of parallel conduct is not enough to infer collusion and it is required to observe additional factors allowing to reject the hypothesis of firms behaving competitively.In this paper, we analyze the institutional framework and the main characteristics of the health system in Chile to show the existence of market segmentation, limited price competition, barriers to entry, and important switching costs. All of which allows to sustain a collusive agreement making it difficult for a new entrant to gain a significant market share quickly, even if it offers a better health insurance plan. Then, we adapt an imperfect competition model of product differentiation with risk averse consumers to derive some testable propositions that allow us to distinguish between competition and collusion outcomes in the health insurance market. Finally, we present robust econometric showing a statistically significant reduction in sales effort, marketing expenses and switching rates among cartel members, compared to non-cartel members, and also show an increase in the profitability of all providers in the market, but a statistically significant higher increase in the profitability of non-cartel members. The empirical evidence, therefore, is consistent with a collusive agreement among the 5 largest health providers to reduce insurance coverage and inconsistent with a competitive equilibrium.

Simple collusive agreements in one-shot first-price auctions

The paper demonstrates that collusion in a private value first price auction is likely to occur even in a one shot interaction. The strategies of the colluding parties must be mixed since agreeing to submit a bid equal to the reservation price of the seller provides the incentive for that bidder to cheat on the designated winner. We deal with a complete information environment with arbitrary number of bidders. We characterize the sensible equilibrium outcome where the two bidders with the highest valuations collude. We show that the equilibrium outcome is unique and that the probability of collusion exceeds 1/2.

Risk Aversion, Prospect Theory, and Strategic Risk in Law Enforcement: Evidence from an Antitrust Experiment

In this paper we investigate the effects of risk preferences and attitudes towards risk on optimal antitrust enforcement policies. First, we observe that risk aversion is negatively correlated with players' proclivity to form a cartel, and that increasing the level of fines while reducing the probability of detection enhance deterrence. This confirms that the design of an optimal law enforcement scheme must keep risk attitudes into account, as suggested by Polinsky and Shavell. We also notice that players' propensity towards communication drops right after detection even if the collusive agreement was successful, and it declines as the sum of the fines paid by a subject increases. This effect could be explained by availability heuristic, Â-a cognitive bias, where people's perception of a risk is based on its vividness and emotional impact rather than on its actual probability. Our results also confirm the crucial role of strategic risk considerations (analogous to risk dominance for one shot games) in determining the effects of leniency programs. Indeed, we show that the effectiveness of leniency programs in deterring cartels is mostly due to the increased risk of a cartel member being cheated upon when entering a collusive agreement, while the risk of a cartel being detected by an autonomous investigation of the Authority seems to play a less important role.

Emergence of Cooperation in Public Goods Problems

In this paper, we discuss several issues related to public goods provision. Unlike many Austrians, we do not think that the concept of public goods - or of collective action - is an inherently flawed idea, even though we reject the alleged welfare implications of public goods theory, as proposed by orthodox public finance literature. We then argue that the structure of a generic public goods problem is more a game of chicken or an assurance game than a prisoner's dilemma and that this has important implications with regard to the plausibility of cooperative outcomes. Namely, when the public goods problem has the weakest-link structure and can be represented as an assurance game, then the cooperative outcome will be self-enforcing. In many cases, the public goods problems can be transformed into weakest-link games or different mechanisms can be found to ensure cooperation. We also discuss the difference between a public goods problem and collusion. We assert that, unlike public goods problems, collusive agreements have the structure of a prisoner's dilemma. Overall, our paper suggests that there are reasons to be optimistic about stability and efficiency of stateless societal orders.

THE NATURE AND DEVELOPMENT OF THE GENERAL INSURANCE INDUSTRY IN AUSTRALIA TO 1973

The development of the insurance industry in Australia in the twentieth century was fundamentally shaped by a collusive code of conduct called the tariff. This arrangement, established to overcome problems of uncertainty, initially benefited both tariff and non‐tariff firms by enhancing market stability. It also reduced competition. The collusive agreements gradually broke down, however, as new entrants and products entered the market in the 1950s. Self‐regulation gradually gave way as the ‘rules of the game’ changed. The result was a period of instability before new competitive practices, and more direct and specific regulatory requirements emerged in the 1970s.

Fair Payments for Efficient Allocations in Public Sector Combinatorial Auctions

Motivated by the increasing use of auctions by government agencies, we consider the problem of fairly pricing public goods in a combinatorial auction. A well-known problem with the incentive-compatible Vickrey-Clarke-Groves (VCG) auction mechanism is that the resulting prices may not be in the core. Loosely speaking, this means the payments of the winners could be so low, that there are bidders who would have been willing to pay more than the payments of the winning bidders. Clearly, this “unfair” outcome is unacceptable for a public sector auction. Recent advances in auction theory suggest that combinatorial auctions resulting in efficient outcomes and bidder-Pareto-optimal core payments offer a viable practical alternative to address this problem. This paper confronts two critical issues facing the bidder-Pareto-optimal core payment. First, motivated to minimize a bidder's ability to benefit through strategic manipulation (through collusive agreement or unilateral action), we demonstrate the strength of a mechanism that minimizes total payments among all such auction outcomes, narrowing the previously broad solution concept. Second, we address the computational difficulties of achieving these outcomes with a constraint-generation approach, promising to broaden the range of applications for which bidder-Pareto-optimal core pricing achieves a comfortably rapid solution.

The Role of Economics in Cartel Detection in Europe

In the wake of the successful implementation of leniency programs in and across the EU other instruments of cartel detection have become less prominent. In the period from 2002 to the end of 2005, the Commission adopted 30 statements of objections, a necessary procedural step before taking a decision in cartel cases, roughly 213 of which were based on leniency applications. While accepting the contribution of leniency in pursuing the overarching objective of antitrust policy in the context of cartels - deterrence and desistance of collusive agreements - the following article argues in favour of a more balanced tool set for cartel detection including economic methods.The paper is structured in the following way. Section 2 provides an introduction to the nature of collusion and the role of economics. Section 3 discusses the legal basis and the enforcement instruments available to the Commission for Fighting Cartels. Section 4 discusses the interdependency and the individual advantages of leniency and ex officio cartel detection. Section 5 puts forward the main challenges any economic methodology to trigger ex officio inspections has to deal with. Section 6 discusses the two main methods for cartel detection - top down and bottom up approaches. Section 7 concludes.

Do Antitrust Laws Facilitate Collusion? Experimental Evidence on Costly Communication in Duopolies*

AbstractBertrand supergames with non‐binding communication are used to study price formation and stability of collusive agreements on experimental duopoly markets. The experimental design consists of three treatments with different costs of communication: zero‐cost, low‐cost and high‐cost. Prices are found to be significantly higher when communication is costly. Moreover, costly communication decreases the number of messages, but more importantly, it enhances the stability of collusive agreements. McCutcheon (1997) presents an interesting application to antitrust policy by letting the cost of communication symbolize the presence of an antitrust law that prohibits firms from discussing prices. Although our experimental results do not support the mechanism of McCutcheon's (1997) argument, the findings point in the direction of her prediction that antitrust laws might work in the interest of firms.

THE EFFECTS OF LENIENCY PROGRAMS AND FINES ON CARTEL STABILITY

ABSTRACTUsing a stylized oligopoly model, we analyze the effect of cartel deterring fines, taking into consideration exemptions granted to cartel members cooperating with the competition authorities. We conclude that the fines can act as a deterrent to breaking collusive agreements, thus stabilizing the cartel.