Collusive Profits Research Articles

Collusion in Second‐Price Auctions under Minimax Regret Criterion

Collusion in auctions, with different assumptions on distributions of bidders' private valuation, has been studied extensively over the years. With the recent development of on‐line markets, auctions are becoming an increasingly popular procurement method. The emergence of Internet marketplaces makes auction participation much easier and more convenient, since no physical presence of bidders is required. In addition, bidders in on‐line auctions can easily switch their identities. Thus, it may very well happen that the bidders in an auction have very little, if any, prior knowledge about the distributions of other bidders' valuations. We are proposing an efficient distribution of collusive profit for second‐price sealed bid auctions in such an environment. Unlike some known mechanism, which balance the budget only in expectation, our approach (which we call Random k) balances the budget ex‐post. While truth‐telling is not a dominant strategy for Random k, it is a minimax regret equilibrium.

Bidder collusion

We analyze bidder collusion at first-price and second-price auctions. Our focus is on less than all-inclusive cartels and collusive mechanisms that do not rely on auction outcomes. We show that cartels that cannot control the bids of their members can eliminate all ring competition at second-price auctions, but not at first-price auctions. At first-price auctions, when the cartel cannot control members’ bids, cartel behavior involves multiple cartel bids. Cartels that can control bids of their members can suppress all ring competition at both second-price and first-price auctions; however, shill bidding reduces the profitability of collusion at first-price auctions.

Forward trading and collusion in oligopoly

We consider an infinitely repeated oligopoly in which at each period firms not only serve the spot market by either competing in prices or quantities but also have the opportunity to trade forward contracts. Contrary to the pro-competitive results of finite-horizon models, we find that the possibility of forward trading allows firms to sustain collusive profits that otherwise would not be possible to achieve. The result holds both for price and quantity competition and follows because (collusive) contracting of future sales is more effective in deterring deviations from the collusive plan than inducing the previously identified pro-competitive effects.

Collusion with capacity constraints over the business cycle

This paper investigates the effect of capacity constraints on the sustainability of collusion in markets subject to cyclical demand fluctuations. In the absence of capacity constraints, Haltiwanger and Harrington (1991) [Haltiwanger, J., Harrington, J., 1991. The impact of cyclical demand movements on collusive behavior. Rand Journal of Economics. 22, 89–106.] show that firms find it more difficult to collude during periods of decreasing demand. We find that this prediction can be overturned if firms' capacities are sufficiently small. Capacity constraints imply that punishment profits move procyclically, so that periods of increasing demand may lead to lower losses from cheating even if collusive profits are rising. Haltiwanger and Harrington's main prediction remains valid for sufficiently large capacities.

On the profitability of collusion in location games

In this note we take a first step towards the analysis of collusion in markets with spatial competition, focusing on the case of pure location choices. We find that collusion can only be profitable if a coalition contains more than half of all players. This result holds for location games played in k-dimensional Euclidean space as long as consumers are distributed via atomless density functions. For competition on the unit interval, unit circle, and unit square we also derive sufficient conditions for collusion to be profitable. The results have immediate implications for mergers in spatial markets.

Collusion, Exclusion, and Inclusion in Random-Order Bargaining

This paper examines the profitability of three types of integration in a cooperative game solved by a random-order value (e.g. the Shapley value). Collusion between players i and j is a contract merging their resources in the hands of one of them, say i . This contract can be represented as a combination of exclusion, which lets i exclude j ’s resource but not use it himself, and inclusion, which lets i use j ’s resource but not exclude j from it. This representation yields a third-difference condition on the characteristic function that determines the profitability of collusion, generalizing existing results for specific games. Namely, collusion is profitable [unprofitable] when the complementarity of the colluding players is reduced [increased] by other players.

Oligopolistic pricing over the deterministic market demand cycle: some evidence from the US Portland cement industry

Haltiwanger and Harrington (1991) [Haltiwanger, J., Harrington, J.E. Jr., 1991. The impact of cyclical demand movements on collusive behavior. Rand Journal of Economics 22, 89–104.] formulated a theory of self-enforcing collusion assuming a deterministic demand cycle. They predicted that under a self-enforcing non-cooperative pricing scheme, for any level of demand, the price in the rising part of the cycle would always be greater than the price in the falling part of the cycle. They also predicted that the path of collusive profits should reach its peak before market demand. We test their predictions using data from the Portland cement industry. The hypotheses are tested using a multi-equation system, differentiating the boom and the bust periods from 1974 to 1989. The results support both of Haltiwanger and Harrington’s hypotheses.

On the formation of industry lobby groups

This paper provides a step towards a more complete theory of lobbying, extending the menu-auction model of Grossman and Helpman [Grossman, G.M., Helpman, E., 1994. American Economic Review 84, 833–850] A new explanation is proposed for why more concentrated industries more easily overcome the free-rider problem inherent in political collective action. Instead of focusing on transactions costs as Olson [Olson, M., 1965. The Logic of Collective Action, Harvard University Press, Cambridge, MA], we show that more collusive industries with higher collusive profits have a greater incentive to form lobby groups and to contribute to industry lobbying. Moreover, more polluting industries also have a greater incentive to form and contribute to a lobby group.

European anti-dumping policy and the profitability of national and international collusion

This paper is the first to study the effect of European antidumping policy on market structure. We analyze the incentives for firms to engage in a domestic or international cartel of implicit collusion in a multi-stage setting and concentrate on how European antidumping policy influences the incentives for firms to collude domestically or internationally. The question whether antidumping regulation helps to establish, maintain or rather endanger full cartels as well as cartels restricted to domestic firms only is tackled. Our findings suggest that antidumping legislation can both have a procompetitive and an anticompetitive effect. Which case prevails depends crucially on the welfare objective function used by the European government and also on the cost asymmetry and the degree of product heterogeneity between domestic and foreign firms. In addition to market structure we also discuss welfare effects. We find that antidumping measures are capable of both increasing or decreasing total community welfare depending on the type of measures installed.

The foreclosure argument for exclusive dealing: The case of differentiated retailers

I analyze a cooperative characteristic-form game between two differentiated producers and a downstream retail sector. When there is a single downstream retailer, the game always has a nonempty Core, involving the retailer being a common dealer. Each producer can at most earn his increment to the collusive industry profit. This result is similar to what is obtained in the literature in an extensive-form noncooperative formulation of the game. When there are two differentiated downstream retailers, the Core is empty when products and retailers are too homogeneous. For sufficient product and retailer differentiation, the Core is nonempty. In these cases the retailers are always common dealers for both products.

European Anti-Dumping Policy and the Profitability of National and International Collusion

This paper is the first to study the effect of European Anti-dumping policy on market structure, i.e., the incentives of firms to engage in a domestic or international cartel in a multi-stage setting. The analysis concentrates on how European anti-dumping policy influences the incentives for firms to collude domestically or internationally. We tackle the question of whether anti-dumping regulation helps to establish, maintain or endanger full international cartels as well as cartels restricted to domestic firms only. Our findings suggest that European anti-dumping legislation can have both a pro-competitive and an anti-competitive effect. Which effect prevails depends crucially on the welfare objective function used by the European government and also on the cost-asymmetry and the degree of product heterogeneity between domestic and foreign firms. In addition to market structure, we also discuss welfare effects. We find that anti-dumping measures are capable of both increasing and decreasing total European Community welfare, depending on the type of measures installed.

Dynamic Pricing in Retail Gasoline Markets

This paper tests for price patterns in retail gasoline markets consistent with those predicted by models of implicit collusion among firms. Recent supergame models show that the highest supportable collusive price is a function of today's profit relative to expected future profit: collusive prices are higher when predictable changes in demand or cost lead firms to expect that collusive profits are increasing rather than declining. Ceteris paribus, collusive profits will be expected to increase when demand is expected to increase and/or costs are expected to decline. Using panel data on sales volume, and retail and wholesale prices in 59 cities over 72 months, we find results consistent with these predictions. Controlling for current demand and input price, the elasticity of current retail margins with respect to expected next-month demand is about 0.37. The elasticity of current margins with respect to next-month wholesale price is about -0.37. The results are inconsistent with inventory effects.

DANGO: JAPAN'S PRICE‐FIXING CONSPIRACIES

This paper addresses two questions about collusion in the Japanese construction industry. First, what mechanisms are used for enforcing the collusive agreement, for dividing the spoils, and for preventing the entry of new firms seeking a share of the collusive profits? Second, how much are prices raised as a result of the collusion?

Collusion and rent-seeking

This paper has explored the possibilities for profitable collusion in rent-seeking games. Anticipated collusion is only profitable for coalitions that approach the size of the grand coalition, while unanticipated collusion is always profitable. By reducing the rent-seeking expenditures of the colluding firms, collusion bestows an external benefit on non-colluding firms. Economies of scale in rent-seeking increase the profitability of collusion, while diseconomies of scale reduce the attractiveness of collusion. When 1 of 3 firms enjoys an incumbency advantage, the total gains from collusion fall as the incumbency advantage rises. Furthermore, 2-firm collusion is more profitable to the colluding coalition when the incumbent colludes with a non-incumbent than when the two non-incumbents collude, whether or not the collusion is anticipated. In all circumstances, unanticipated collusion is more profitable to the colluding coalition than perfectly anticipated collusion. Colluding firms may therefore have an incentive to conceal their collusive activity, even when collusion is legal.

地方都市圏の非日常的サービス市場の活性度に関する研究

This paper provides an analytical framework to investigate the structure of local service markets with entry barriers, and to assess the viability of the local markets. Except in the short run, both market structure and service quality are endogenous; both depend on basic ingredients, such as technology of R & D, demand conditions, natures of factor markets, knowledge accessibility and basic functions of local human networks. In our markets of non-daily consumed services, services are supposed to be horizontally differentiated per se; firms are assumed to maximize their collusive profits. A theoretical model is presented to explain the relationships between market structure and market environment. Two measures, IUs (Indirect Utility Indices) and NNEs (Normalized numbers of entrants), are proposed to investigate the market viability. An empirical research is also carried out to illustrate the applicability of our indices.

Reevaluation of the structure-conduct-performance paradigm in banking

In the banking industry, the structure-performance relationship has frequently been evaluated with results suggesting that collusive profits occur. These studies have been criticized for inappropriately accounting for entry barriers,ad hoc assumptions concerning the appropriate structure measure, limited samples, and ignoring firm efficiency differences. We address these concerns and find categorical support for the efficient structure hypothesis, and limited support for the traditional structure-collusion hypothesis when markets are characterized by significant entry barriers. The findings suggest the competing hypotheses may actually be complementary theories, and the negative role of entry barriers may be more important than previously thought.

Markets with Consumer Switching Costs

Ex ante homogeneous products may, after the purchase of one of them, be ex post differentiated by switching costs including learning costs, transaction costs, or artificial costs imposed by firms, such as repeat-purchase discounts. The nonco-operative equilibrium in an oligopoly with switching costs may be the same as the collusive outcome in an otherwise identical market without switching costs. However, the prospect of future collusive profits leads to vigorous competition for market share in the early stages of a market's development. The model thus explains the emphasis placed on market share as a goal of corporate strategy.

Abusive Trade Practices: An Economic Analysis

Experience guides the development of business practices, and these practices in turn challenge economic analysis. In some cases the analytical challenge has been successfully met and economic science enriched. But economics has not yet attained perfection. Nevertheless, antitrust policy should depend on economic analysis if its purpose is to serve the ends of individual liberty and economic efficiency. To ignore economics leads to restrictions on commerce which can defeat the ultimate purposes of trade regulation despite good intentions. Even in furthering the political purposes of antitrust policy, such as the preservation of small firms, economic science is a helpful guide. Few trade practices are abusive under all circumstances. Sometimes a given practice is not only compatible with competition but may actually enhance it. Under different circumstances, the same practice may be a symptom of monopoly power without being a source of that power. For example, a particular device may be a vehicle of price discrimination that more fully exploits an already existing monopoly. These are the problems that form the subject of the first part of this paper. The second part of the paper deals with predatory tactics. Pushed to their extreme, these are tactics designed to destroy competitors; selling below cost is the leading instance of such predatory conduct. To study such economic warfare, it is necessary to consider the relative profitability of tacit collusion, cartel, and monopoly achieved by merger. Absent legal constraints, merger is generally the most efficient route to monopoly profit. These problems lead to the analysis of the forces underlying competition and of the role of antitrust policy in the third section of the paper. Since barriers to merger play a particularly important role in preserving competition, the fourth part of the article considers the effects on competition of those conglomerate firms that may owe their existence in large part to merger. In general, this discussion poses the questions of why certain firms engage in diverse activities and whether, if large size results, monopoly power becomes a possible consequence.