Price Collusion Research Articles

Bid Rigging and Entry Deterrence in Public Procurement: Evidence from an Investigation into Collusion and Corruption in Quebec

We study the impact of an investigation into collusion and corruption to learn about the organization of cartels in public procurement auctions. Our focus is on Montreal’s asphalt industry, where there have been allegations of bid rigging, market segmentation, complementary bidding, and bribes to bureaucrats, and where, in 2009, a police investigation was launched. We collect procurement data and use a difference-in-difference approach to compare outcomes before and after the investigation in Montreal and in Quebec City, where there have been no allegations of collusion or corruption. We find that entry and participation increased, and that the price of procurement decreased. We then decompose the price decrease to quantify the importance of two aspects of cartel organization, coordination and entry deterrence, for collusive pricing. We find that the latter explains only a small part of the decrease.

How Product Innovation Can Affect Price Collusion

This paper examines the relationship between product innovation and the success of price collusion using novel laboratory experiments. Average market prices in low innovation experiments are significantly higher than those in high innovation, but otherwise identical experiments. This price difference is attributed to low innovation experimental subjects' greater common market experience. The data illustrate how collusion can be perceived as the only way to make it in low innovation markets where product innovation is not a viable strategy for increasing profits. They suggest that product homogeneity can be a proximate cause, and product innovation an ultimate cause, of collusion.

POLICY IMPLICATION OF PRICE COLLUSION IN A DUOPOLY MARKET WITH DIFFERENTIATED PRODUCTS

This paper uses a duopoly model with horizontally differentiated products to analyse how price collusion in the presence of a uniform tax affects market equilibrium. Moreover, this paper investigates the effect of price collusion on social welfare and the government's decision in setting the optimal tax. We show that in the presence of a uniform tax, instead of bringing social welfare down as is traditionally believed, price collusion affects government policy implication. We further show that firms still prefer colluding rather than competing, for which the government's policy decision becomes the key point. By allowing the optimal tax to be negative, we find that under Bertrand competition the government can impose a positive, zero or negative tax on firms depending on the level of the product differentiation. There is a tendency that the more heterogeneous the products, the more subsidies will be given. Under price collusion, the government always subsidises firms regardless of the degree of product differentiation. Finally, we show that when the products are sufficiently differentiated, the government will subsidise firms more under collusion than they will under Bertrand. In short, firms can use price collusion to induce the government to subsidise them.

‘Guaranteed lowest prices: do they facilitate collusion?’: Revisited

We examine the effect of guaranteed lowest price clauses (G.L.P.). First, we correct the proof of Logan and Lutter’s main result that it is the unique equilibrium outcome for firms adopting G.L.P. to charge collusive prices in a simultaneous pricing game, if one uses the trembling-hand perfect equilibrium as the solution concept. Second, we extend their argument to a sequential pricing game in which one firm chooses its price before the other, given that both firms adopt G.L.P. We show that collusive prices is the unique equilibrium outcome in this game even without resorting to any stringent refinement like the trembling-hand perfect equilibrium.

Collusion, profitability and welfare: Theory and evidence

In a differentiated oligopoly model with free entry, the static welfare loss from collusion is larger the lower the entry cost, the larger the market size and the higher the degree of product differentiation. The cartel overcharge is larger the lower the entry cost and the larger the market size, and is independent of the degree of product differentiation. These theoretical results are consistent with evidence from a natural experiment of policy reform, the introduction of cartel law in the UK in the late 1950s. Price-cost margins declined after the breakdown of cartels in low-capital and larger-sized industries relative to capital-intensive and smaller-sized ones. There is weaker evidence of a fall in price-cost margins in consumer good and advertising-intensive relative to producer good and low-advertising industries. Crucially, these effects are not observed for industries that were not affected by the cartel law. A comparison of these findings with evidence on the incidence of collusion suggests that the welfare loss from collusive pricing may often be smaller in industries where cartels tend to form than in those where collusion is more difficult to sustain.

Taxation and the sustainability of collusion: ad valorem versus specific taxes

Assuming constant marginal cost, it is shown that a switch from specific to ad valorem taxation that results in the same collusive price has no effect on the critical discount factor required to sustain collusion. This result is shown to hold for Cournot oligopoly when collusion is sustained with Nash-reversion strategies or optimal-punishment strategies. In a Cournot duopoly model with linear demand and quadratic costs, it is shown that the critical discount factor is lower with an ad valorem tax than with a specific tax that results in the same collusive price. However, in contrast to Colombo and Labrecciosa (J Public Econ 97:196–205, 2013) it is shown that the revenue is always higher with an ad valorem tax than with a specific tax.

Rent sharing to control noncartel supply in the German cement market

AbstractA challenge for many cartels is avoiding a destabilizing increase in noncartel supply in response to having raised price. In the case of the German cement cartel that operated over 1991–2002, the primary source of noncartel supply was imports from Eastern European cement manufacturers. Testimonies in a private enforcement case have claimed that the cartel sought to control imports by sharing rents with intermediaries in order to discourage them from sourcing foreign supply. Specifically, cartel members would allow an intermediary to issue the invoice for a transaction and charge a fee even though the output went directly from the cartel member's plant to the customer. We investigate this claim by first developing a theory of collusive pricing that takes account of the option of bribing intermediaries. The theory predicts that the cement cartel members are more likely to share rents with an intermediary when the nearest Eastern European plant is closer and there is more Eastern European capacity outside of the control of the cartel. Estimating a logit model that predicts when a cartel member sells through an intermediary, the empirical analysis supports both predictions.

纵向结构与投入品竞价合谋的悖论分析——日资配件企业“垄断协议”案的若干思考

Price collusion and price discrimination dominated by multinational enterprises have been investigated and punished by China's antitrust authorities since 2013. Based on Japanese auto parts companies' price bidding collusion case, this paper models the behavior of inputs price collusion and transfer pricing inside these enterprise groups under vertical equity-related structure. Comparative static analysis shows that price bidding collusion between affiliated enterprises does not align with the goal of profit maximization. Actually, the collusion just acts as a tool for multinational enterprises as real controllers to transfer profits from downstream vehicle joint ventures to their upstream parts companies in the background of asymmetric equity ratio and profitability between downstream and upstream firms. This paper confirms the desirability of profit transfer hypothesis from the perspectives of equity ratio and enterprise operation modes, and also deep analyzes the real contradictions faced by structure-conspiracy rules by the combination of the relationship between market structure and profits in main market segments. It provides the main policy recommendations that antitrust legislation in Chinese automobile industry should involve from behavior punishment to regulation intervention, more evidence supported by industrial organization analysis should increase appropriately to improve the scientific level of law enforcement, and the principle of reasonable presumption should be more used to avoid inadequate intervention on enterprise behavior.

Collusion in Two-Sided Markets

This paper explores the incentives for, and the effects of, collusion in prices between two-sided platforms. We characterize the most profitable sustainable agreement when platforms collude on both sides of the market and when they collude on a single side of the market. Under two-sided collusion, prices on both sides are higher than competitive prices, implying that agents on both sides become worse off as compared to the competitive outcome. An increase in cross-group externalities makes two-sided collusion at a given profit level harder to sustain, and reduces the harm from collusion suffered by the agents on a given side as long as the collusive price on that side is lower than the monopoly price. When platforms collude on a single side of the market, the price on the collusive side is lower (higher) than the competitive price if the magnitude of the cross-group externalities exerted on that side is sufficiently large (small). As a result, one-sided collusion may benefit the agents on the collusive side and harm the agents on the competitive side.

The Value of Collusion with Endogenous Capacity and Demand Uncertainty

Collusion has often been alleged in industries where long‐lived capacity investments are important. This article develops a computational duopoly model with capacity investments, demand shocks and either competitive or collusive pricing. It shows that allowing for endogenous capacity investments can sometimes make collusion less valuable than competition and that it can change the normal relationships between the profitability of collusion and both the discount rate and industry‐wide demand shocks.

Collusion Under Imperfect Monitoring with Asymmetric Firms

AbstractWe explore the effects of asymmetries in capacity constraints on collusion where market demand is uncertain and where firms’ sales and prices are private information. We show that all firms can infer when at least one firm's sales are below some firm‐specific ‘trigger level.’ When firms use this public information to monitor the collusive agreement, price wars may occur on the equilibrium path. Symmetry facilitates collusion but, if price wars are sufficiently long, then the optimal collusive prices of symmetric capacity distributions are lower on average than the competitive prices of asymmetric capacity distributions. We draw conclusions for merger policy.

Price Regulation and Tacit Collusion in the Interbank Electronic Bulk and Retail Credit Transfer Services: Thailand's Experience

Price control is often perceived as a convenient tool to protect consumers’ interest as it is simple and visible. However, when the state sets a maximum price of a product or service in a potentially competitive market, it may unintentionally undermine competition in the market and may even facilitate tacit price collusion. This paper illustrates such regulatory fallacy in the case of the electronic interbank credit transfer service in Thailand, where the Bank of Thailand sets the maximum rates that a commercial bank may charge its customers. It also provides a follow-up of the central bank's regulatory amendments following the findings of the report.

Evolution of a Collusive Price in a Networked Market

This paper studies evolution of firms’ behavior in a networked Bertrand oligopoly market, in which firms who are located on vertices of a network compete in price with their neighbors. This network model is also applied to a market with multi-dimensionally differentiated products. In a non-networked market, it is known that the Bertrand-Nash equilibrium pricing is evolutionarily stable. We show, however, that in our large networked market, the Bertrand-Nash equilibrium price is not stable but a collusive price is evolutionarily stable under weak selection. As the magnitude of transportation cost increases, firms charge a more collusive price in the long run. The results suggest that collusive pricing prevails in a large market if and only if it is networked.

Three Essays on Product Collusion

In a market for differentiated products, firms have the ability to collude on the choice of products offered in addition to or in lieu of colluding on the prices charged for those products. However, the empirical literature has only considered price collusion. This dissertation proposes a methodology to measure product space and price collusion. To do so, I model firms as competing in an infinitely repeated extensive form game. I show that a subset of equilibria to the dynamic game can be represented as subgame perfect Nash equilibria to a static game. The static equilibria index the degree to which firms collude through reduced- form parameters. I show that these parameters are robust to the Corts Critique and can be estimated using standard techniques when researchers have access to market level data. I then use this methodology to study competition in the market for super-premium ice cream during 2013. I find evidence that Ben & Jerry’s and Haagen-Dazs not only colluded in the prices they charged, but substantially colluded in the choice of flavors that were offered. Then, I construct counterfactuals to measure the impact of collusion on the set of products offered, the prices charged, and welfare. I find that conventional policy analysis that considers only price collusion understates the welfare effects.

The Ice Cream Split: Empirically Distinguishing Price and Product Space Collusion

In a market for differentiated products, firms have the ability to collude on the choice of products offered in addition to or in lieu of colluding on the prices charged for those products. However, the empirical literature has only considered price collusion. This paper proposes a methodology to measure product space and price collusion. To do so, I model firms as competing in an infinitely repeated extensive form game. I show that a subset of equilibria to the dynamic game can be represented as subgame perfect Nash equilibria to a static game. The static equilibria index the degree to which firms collude through reduced-form parameters. I show that these parameters can be estimated using standard techniques when researchers have access to market level data. I then use this methodology to study competition in the market for super-premium ice cream during 2013. I find evidence that Ben & Jerry’s and Haagen-Dazs not only colluded on the prices they charged, but substantially colluded in the choice of flavors that were offered. Then, I construct counterfactuals to measure the impact of collusion on the set of products offered, the prices charged, and welfare. I find that conventional policy analysis that considers only price collusion understates the welfare effects.

Why Are Imported Automobiles So Expensive in China? A Structural Approach

This paper studies the effectiveness, competition structure and welfare effect of the tariff imposed on imported cars in China’s automobile market. Our empirical findings suggest that the tariff cannot switch entire demand for imported cars to domestic cars: the tariff decreases sales of imported cars by about 0.25 million for half year, among which only 80% is switched to domestic cars, while 20% of the demand is excluded. Therefore, the tariff excludes the demand for imported cars, leading to a huge welfare loss. The reason behind this exclusion effect is the weak substitution between imported cars and domestic cars. Our empirical analysis also provides evidence for collusive pricing among car importers, which is caused by higher product differentiation among imported brands, supporting the theoretical analysis about the negative relationship between product substitutability and collusion sustainability. Furthermore, we show that the tariff is not the main reason for this collusion.

British naval armaments, cartels, and defence planning between the world wars

Pendant l’entre-deux-guerres, l’industrie britannique privée de l’armement naval comprenait une poignée de grandes entreprises. Leur relation avec l’État britannique est importante pour les historiens : en effet, le désarmement avait diminué la capacité de l’industrie à répondre aux besoins d’une expansion navale rapide, créant en retour des difficultés considérables pour les planificateurs de guerre. Cet article présente de nouvelles données sur la collusion des prix au sein des entreprises navales, et montre comment l’industrie privée a réagi aux défis du désarmement, avant de chercher à profiter du réarmement. Ce faisant, il avance l’idée que l’amirauté n’avait pas reçu, de la part du Cabinet et du Trésor, les moyens de préserver les capacités de l’industrie, et que, en conséquence, et malgré la connivence pour établir des prix abusifs, la formation d’un cartel a probablement sauvé les gouvernements de l’entre-deux-guerres de leurs propres erreurs.

Pre-announcements of price increase intentions in liner shipping spot markets

Carriers in liner shipping markets frequently make public announcements of general rate increase (GRI) intentions, based on which EU authorities have concerns as to whether this harms market competition. This paper aims to empirically investigate how well the GRI system works from an industrial competition perspective, which will indirectly indicate whether carriers are able to manipulate spot rates following GRI announcements. Taking the Far East–North Europe trade between 2009 and 2013 as an example, the paper first reveals the gradual increase of GRI frequency and size, which reflects carriers’ attempts to restore profitability against overcapacity. However, out of all the GRI events only 28.6% were observed to be successful. Since these GRI successes must be the results of either price collusion (if any) and/or normal rate change by carriers in response to fundamental market developments, the effective collusion, if it exists, is actually lower than 28.6%. Next, we identify eight factors influencing GRI successes. To further assess their impact, we applied an ordered logit regression analysis, which, based on four of the factors involved, yields good predictability for GRI success. The four factors, in sequence of explanation power, are the total capacity of GRI carriers, the idling fleet size, the spot rate level, and the average ship-loading factor. Clearly the latter three factors are market fundamentals, which are unlikely to be influenced by an individual carrier in the short term. In actual fact, the conclusion reached is that there is little evidence that carriers can manipulate and distort spot rates through GRIs.

Resale Price Maintenance by Japanese Newspapers

In Japan, newspapers enjoy a special exemption from antimonopoly prohibitions against resale price maintenance (supp liers’ stipulations that bar downstream firms from price discounting ), but are each require d to set uniform prices throughout Japan. In fact, the newspapers have rarely changed their subscription prices in recent years, and the three leading national dailies, together accounting for about half the total industry circulation, and thirteen other papers accounting for another one eighth of industry circulation, all have set exactly the same price (3,925 yen per month). The remaining local papers all set lower prices. The authorized resale price maintenance, a nd prohibition against prices that vary geographically, have allowed collusive price increases that I here estimate to be around 500 yen per month, entailing economic waste of about 300-billion yen ($3-billion) per year but adding only around 16-billion yen per year to newspaper profit. The increased profit margin on subscriptions is much offset by reduced sale of ads.

Rent Sharing to Control Non-Cartel Supply in the German Cement Market

A challenge for many cartels is avoiding a destabilizing increase in non-cartel supply in response to having raised price. In the case of the German cement cartel that operated over 1991-2002, the primary source of non-cartel supply was imports from Eastern European cement manufacturers. Industry sources have claimed that the cartel sought to control imports by sharing rents with intermediaries in order to discourage them from sourcing foreign supply. Specifically, cartel members would allow an intermediary to issue the invoice for a transaction and charge a fee even though the output went directly from the cartel member’s plant to the customer. We investigate this claim by first developing a theory of collusive pricing that takes account of the option of bribing intermediaries. The theory predicts that the cement cartel members are more likely to share rents with an intermediary when the nearest Eastern European plant is closer and there is more Eastern European capacity outside of the control of the cartel. Estimating a logit model that predicts when a cartel member sells through an intermediary, the empirical analysis supports both predictions.