Competition and Regulation. Lecture 4 Collusion

Transcription

1 Competition and Regulation Lecture 4 Collusion

2 Overview Definition Where does collusion arise? What facilitates collusion? Detecting cartels; Policy 2

3 Definition Agreement to control prices, market share, or a quality attribute of a good or service, but also control of necessary inputs and essential facilities to prevent further entry; The law should punish only explicit collusion because of uncertain assessment and potential instability of tacit collusion. However studying implicit (tacit) collusion to make it unstable is important as well. 3

4 Conditions for collusion A collusive equilibrium may be unstable due to temptations to deviate from cooperation. Collude 10 Not collude Collude Not collude

5 Conditions for collusion However with repeated interaction, collusion is possible when a punishment for deviation is possible and credible; A) deviations should be detectable immediately; B) Punishment should be credible and sufficiently costly for deviating firm; 5

6 Repeated games A game repeated two or a known number of times can be solved with backward induction Collusion is never a NE in this type of games; Collude 10 Not collude Collude Not collude

7 Conditions for collusion An infinitely repeated game (or with unknown end period) instead can have a collusive outcome if, after deviation is detected, colluding again becomes impossible; This can be enforced by the choice of trigger strategy (or tit for tat) by at least one player; Collude 10 Not collude Collude Not collude

8 Coordination Under tacit collusion a further problem is how to coordinate. Ex. How to choose collusive price? How to adjust it when circumstances/costs conditions change? Market sharing agreement (particularly geografic) solve this problem and also the problem of detection of deviation 8

9 Factors Concentration. Smaller numbers facilitate collusion: Less incentive to deviation to gain mkt shares; Easier to coordinate; Easier to detect deviation. But asymmetric mkt. shares make it more unlikely. More temptation to deviate HHI not a good measure. Entry. The easier entry, the less useful collusion. Entrants will destroy the equilibrium. Cross ownership or agreements (joint ventures). Comunication and interest convergence 9

10 Factors Frequency of orders. Large one-off orders may destroy collusive equilibria; Buyer power. Elasticity. Less to be gained by colluding if the elasticity is high. Also incentives to deviation may be larger; Demand stability. Easier to collude/more transparency; Product Homogeneity. Easier to detect deviations Symmetry. Asymmetric firms are less likely to collude. Difficult to reach agreements (esp tacit). Large firms could be difficult to punish. 10

11 Factors Multi-market interaction. Punishment in more than one market is more costly to deviant. Not so clear however: also the temptation is larger; Excess capacity. More difficult if large, however as above result is ambiguous Observability of market shares and prices is tantamount; policy should focus on tools that facilitate transparency and monitoring 11

12 Exchange of info Collusion could be enforced through exchange of info. Market studies, prices, market shares. Even aggregate market data could facilitate. In theory more transparency could increase welfare, but exchange of individual information is almost certainly a sign of collusion Should be forbidden 12

13 Coordination signals Focal points. No need of info. exchange. Usually status quo (especially market division). Announcement of future prices. If private or without commitment value then collusive. Ex auctions; Public binding announcement instead may be competitive in nature; 13

14 Coordination signals Meeting competition clauses. Use consumer as enforcer of agreement, they deliver the information and the gains for the deviant are smaller Uniform delivery price increases observability; A commitment not to sell at a discount may facilitate collusion (MFN clause) 14

15 Conditions (para ) Suppose n firms. Π c is the present profits from collusion Π d is present profit from deviation V c is future value of colluding (eg the stream of future profits continuining the collusive outcome) V p future value under punishment (eg the stream of future profits after collusion collapses) δ= discount factor=1/(1+r) where r is a discount rate Then for firm i collusion is justified if present value of collusion is larger than the present value of deviation 15

16 Conditions 16

17 Conditions Hence if δ is larger than a threshold (r lower than a threshold) then collusion is sustainable; More impatient firms are less likely to collude; Depends on the other side on temptation and punishment; the larger the gains from deviating and the lower the future loss of profits, the less likely is collusion;

18 Should we punish tacit collusion? No reliable data to calculate monopoly price. How close should it be? Conviction on high price grounds is dangerous; Price parallelism can be a result of common shocks or fears of retaliation rather than collusion Inferring collusion for mkt data is not justifiable 18

19 Ex-ante Competition policies Penalties: fines, third-party compensation, criminal penalties for management as a deterrent are important; but so is the probability of being caught; Auction design can prevent signalling practices; ex: contemporaneous rather than sequential auctioning; anonymous bidding; Black list of practices: information sharing, about individual firms data and esp. future strategies cross shareholdings 19

20 Ex post Competition Policies Dawn raids to uncover evidence of explicit collusion Leniency programmes: automatic (voluntary, before investigation starts) and discretionary; Both in the US and EU the discount on the fine may be very large (especially for automatic case) up to automatic immunity; 20