Price Collusion Research Articles

Investment under Demand Uncertainty, Ex-Ante Pricing, and Oligopoly

This paper considers the capacity choice of duopolists who set price ex-ante under demand uncertainty with risk-neutrality. The duopolists compete for market shares on the basis of availability of supply, rather than by price competition. Collusive pricing coexists with Cournot–Nash capacity choice. A formal model is presented, where the market share of each firm may deviate from the certainty share due to rationing. With shares reflecting different costs, capacity utilisation for the lower cost firm is expected to be substantially lower. The implications for the price-cost margin and capacity formation are also explored.

Beyond spectrum auctions. Taking the next step to open spectrum access

Abstract While the current system of auctioning exclusive licences may be the best way to allocate new frequencies for today, spectrum auctions may soon become technologically obsolete, economically inefficient, and legally unconstitutional. An alternative is to step beyond the current paradigm of licensed exclusivity to a system of full openness of entry. This would allow access to spectrum bands through access fees that are determined by demand and supply conditions at the time. Prices for access would vary, depending on congestion. Long-term access at a certain price could be obtained by using a futures market. Such a system converts fixed costs of entry into marginal costs of usage, and removes incentives for collusive pricing.

Minimum Quality Standards and Collusion

We model the introduction of a minimum quality standard in a vertically differentiated duopoly. We extend the literature by determining the standard endogenously, showing that the maximisation of social welfare entails an increase in the surplus accruing to consumers served by the low quality firm and a decrease in the surplus of the remaining consumers. Then, we consider the effects of the standard on the stability of price collusion, proving that the standard makes it more difficult for firms to collude if consumers are sufficiently rich.

Minimal Differentiation at the Top

Rooted in the economics of industrial organization, the principle of differentiation ranks as one of the fundamental tenets of competitive strategy. However, while differentiation may be an intuitive means of averting vigorous price competition, casual observation reveals that firms often sell similar, if not perfectly identical, product features. This paper examines the effect of (possibly tacitly) collusive pricing on product location choices in a vertical differentiation framework: when firms are able to successfully collude on price, they minimally differentiate at the top of the vertical spectrum. While firms jointly earn first-best profits, overall welfare is unambiguously lower.

Spatial evolutionary game theory: Hawks and Doves revisited

We consider a spatial generalization of evolutionary game theory in which strategies are distributed over a spatial array of sites. We assume that the strategy corresponding to a given site has local interactions with the strategies sitting on neighbouring sites, and that the strategies change if neighbouring strategies are doing better. After briefly setting the stage with a formal definition of spatial evolutionary game theory, we consider the spatial extension of the Hawk-Dove game, and we show that the results are qualitatively different from those obtained from classical evolutionary game theory. For example, the proportion of Hawks in the population is in general lower in the spatial game than in the classical one. We also consider spatial generalizations of the extensions of the Hawk-Dove game obtained by including strategies such as Retaliator and Bully. Here, too, the results from the spatial game are very different from the classical results. In particular, with space Retaliator is a much more successful strategy than one would expect from classical considerations. This suggests that, in general, spatial structure may facilitate the evolution of strategies such as Retaliator, which do not necessarily prosper classically, and which are reminiscent of the \`nice', \`provokable' and `forgiving' strategies which seem to play a central role in the evolution of cooperation. The results indicate that including spatial structure in evolutionary game theory is a fruitful extension.

Multidimensional Competition on NASDAQ: Did Traders Gain When Dealers Stopped Avoiding Odd-Eighth Quotes?

Apparently spurred by allegations of collusive pricing, dealers in the NASDAQ stocks Apple, Amgen, Cisco, and Microsoft began offering odd-eighth quotes in May 1994. Intel dealers followed shortly thereafter. If the associated dramatic reduction in quoted spreads represented a move to competitive pricing of transaction services, investors would have increased their trading volume. If, by contrast, wide spreads and avoidance of odd-eighth quotes motivated dealers to compete on dimensions such as payments for order flow, immediacy, depth, and other services, the fall in spreads would have undercut such inducements. It is possible that the wide spreads associated with the avoidance of odd-eighth quotes supported an efficient set of transaction services and prices, in which case the true cost of transacting would have increased when dealers began offering odd-eighth quotes. In this case, volume would have decreased. After correcting for NASDAQ-wide and other exogenous determinants of volume, we find a statistically significant increase in the five affected stocks, as predicted by the collusion hypothesis. The volume increase is, however, extremely small compared to the fall in spreads, which suggests that transaction services were also reduced.

Structural Screens in Stochastic Markets

Antitrust policy in the U.S. has evolved into a sophisticated process that takes into account a variety of relevant factors, including potential entry and other dynamic or conduct-oriented considerations, in accordance with modern economic theory. However, simple structural tests are still used as an initial screen to identify those merger cases requiring more detailed analysis. This emphasis on market concentration, rooted in the structure-conduct-performance paradigm of Mason and Bain, is spelled out in written guidelines of the U.S. Department of Justice (DOJ) and has been reiterated in recent public statements by DOJ officials.1 Moreover, a resurgence of academic support for structure-based antitrust policy has been evident in some recent literature [1]. This structural emphasis means at a minimum that relatively more DOJ resources are deployed in the scrutiny of large mergers in concentrated markets, compared with other mergers. Such scrutiny can also consume resources from the merging firms. Moreover, even apart from involvement in a merger, a firm may be subject to closer scrutiny and a higher probability of sanctions or challenges as an increasing function of its market share. For example, a firm with a large market share may face a higher probability of being charged with collusive pricing or predatory pricing (the lightning rod effect). The policy of awarding treble damages makes a firm's expected costs of such charges non-negligible under any positive probability of being found liable.

Optimal symmetric punishments in a Bertrand differentiated products duopoly

This paper studies how product differentiation affects collusive pricing in a duopoly when products are horizontally differentiated and firms compete in prices. In contrast to earlier work, the punishment mechanism supporting collusion is assumed to be the optimal symmetric punishment proposed by Abreu (1986, Journal of Economic Theory 39, 191–225). Such punishments have previously been characterized only for Cournot oligopolies and for Bertrand oligopolies with capacity constraints. The optimal symmetric punishment turns out to have a simple two-phase structure. After one period of an intense price war, firms return to the collusive outcome. If prices are restricted to be non-negative and the discount factor is large, the price war will be extended to more than one period. The best collusive price is shown to be lower, the more substitutable are products.

Competition in the German cellular market? Lessons of duopoly

Abstract By examining the empirical evidence of cellular market evolution in Germany, this paper evaluates the degree of intensity of competition at the level of network operation as well as service provision. Furthermore, the paper incorporates an analysis of the developments on the demand side. It is shown that operators have mainly concentrated their competitive efforts on qualitative service aspects, whereas price competition has been neglected. Following the entry of the third network operator, the hitherto collusive pricing behaviour has changed somewhat, but the operators yet avoid general price reductions in favour of price discrimination. On the level of service provision, the market turns out to be very competitive. Mergers and market exits on one side occur along with new entries on the other side.

An Empirical Analysis of Competition in Brand Differentiated Oligopoly

The paper studies the behaviour of four oligopolistic firms in the Italian coffee market. We study whether their behaviour is better represented by Bertrand behaviour or by collusive pricing. We also investigate the role of advertising in product differentiation.

How Low Is a Guaranteed-Lowest-Price?

A game based on the Bertrand duopoly model is constructed to study the effects of price guarantee policies. Before it chooses a list price, a firm can make a binding commitment to match or beat its competitor's price. The effectiveness of these price guarantee policies in facilitating price collusion depends on the solution concept used. Furthermore, there exists an equilibrium in which neither firm offers any price guarantees and each firm sets price equal to marginal cost.

Collusion over the Business Cycle

We present a theory of collusive pricing for markets in which demand alternates stochastically between fast-growth (boom) and slow-growth (recession) phases. We show that (1) the most-collusive prices are weakly procyclical (countercyclical) when demand growth rates are positively (negatively) correlated through time, and (2) the amplitude of the collusive pricing cycle is larger when the expected duration of boom phases decreases and when the expected duration of recession phases increases. We also offer a generalization of Rotemberg and Saloner's (1986) model, interpreting their findings in terms of transitory demand shocks that occur within broader business cycle phases.

Advertising Rivalry in the U. S. Automobile Industry: A Test of Bain's Hypothesis

This paper examines Bain's Hypothesis that firms in the automobile industry engage in advertising competition and price collusion. It develops a game theoretic model, basing price on product characteristic and advertising on pure and mixed strategies. Solution concepts such as Cournot, Nash and Prisoner's dilemma are possible. The paper then moves into regression results of advertising outlays in newspaper, general magazines, spot television, and network television, given the firm's cashflow, OPEC influence, and Leader-follower hypotheses. When multicolinearity and serial correlation are adjusted for, the results corroborate Bain's advertising hypothesis with price collusion.

Collusive pricing in markets for vertically differentiated products

This paper examines the relationship between product differentiation and the sustainability of collusive pricing in markets for vertically differentiated products. The main finding is that collusion is more easily sustained, the more similar the products are. Exactly the opposite result may be obtained in models of horizontal differentiation. Consequently, when products are differentiated both horizontally and vertically, theory provides no clearcut prediction.

How to sell a pickup truck: ‘Beat-or-pay’ advertisements as facilitating devices

This paper examines the profitability of running an advertisement that promises to pay damages to customers who can find a (serious) price offer that the firm will not undercut. We show that such an advertisement can support a collusive price, and furthermore, that no other firm has an incentive to duplicate the advertisement. The results are shown to be relevant in areas that span several topics in the literature, including models of sales, brand loyalty, and the literature on price matching mechanisms.

The stability of a collusive spatial oligopoly

This paper examines the stability of a free entry spatial equilibrium when firms set collusive Loschian prices. Drawing on developments in game theory it is shown that (Loschian) collusive pricing is feasible and sustainable only if firms earn excess profits. The final section of the paper briefly examines some of the comparative static properties of the model.

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.

Taking the Bitter with the Sweet: Sugar Refiners and the Canadian Regulatory State, 1904–20

IN OCTOBER 1920 the Board of Commerce tried to prop up rapidly falling sugar prices. This decision appeared as a perversion of the agency's mandate to fight the rising cost of living and engulfed the already unpopular board in a controversy it would not survive. The commerce commissioners chose to protect the wrong industry at the v•mng time: the 'sugar barons' traditionally were suspected of price collusion and other Canadian businesses were struggling to survive the autumn 1920 recession. As one leading Nova Scotia merchant explained: 'The refiners, in common with every other business man and industry, must take the bitter with the sweet. '• Protests against the commerce commission's order besieged the already unpopular Union government. The commerce commission was not the only government agency engulfed in a controversy involving sugar refiners. In 1918 the Board of Railway Commissioners, the agency responsible for railway-freight rate regulation, had been accused by Maritime business interests including sugar refiners of mishandling wartime rate changes. The commission, it was contended, had succumbed to pressures from refineries located in Ontario and Quebec and had allowed rate changes to weaken the competitive position of their Maritime competitors, A

Meatpacker Conduct in Fed Cattle Pricing: An Investigation of Oligopsony Power

AbstractMarket power in regional fed cattle markets is measured with an econometric model which links behavior of the margin between boxed beef and fed cattle prices to an economic model of conduct. A noncooperative game theoretic model suggests that for tacitly collusive pricing behavior to persist in equilibrium, oligopsonists must follow a discontinuous pricing strategy. Meatpackers pay low prices for cattle during cooperative phases and purchase cattle aggressively during noncooperative phases. Tests for cooperative/noncooperative conduct and measures of market power are presented. Fed cattle prices in four direct trade regions in the central United States are examined. Evidence of cooperative/noncooperative conduct is present in all markets but has declined over time. Varying conduct across markets and over time suggests it is important to continue monitoring fed cattle markets to assure a competitive environment.

CONCENTRATION IN THE AGRICULTURAL SECTOR

Abstract The objectives of the workshop were to (a) explain the concept of economic concentration and (b) critically analyse concentration in the Dairy and Red Meat sectors. Restrictive regulations were cited, among other factors, as a cause of concentration in both sectors. Policymakers therefore need to implement deregulation and promote contestable markets to prevent potential abuse (restrictive practices and price collusion).