Collusion at the extensive margin

We augment the multi-market collusion model of Bernheim and Whinston (1990) by allowing for firm entry into, and exit from, individual markets. We show that this gives rise to a new mechanism by which a cartel can sustain a collusive agreement: Collusion at the extensive margin whereby firms collude by avoiding entry into each other's markets or territories. We characterise parameter values that sustain this type of collusion and identify the assumptions where this collusion is more likely to hold than its intensive margin counterpart. Specifically, it is demonstrated that where duopoly competition is fierce collusion at the extensive margin is always sustainable. Finally, we provide a theoretic foundation for the use of a “proportional response” enforcement mechanism.     

Multimarket Contact in Health Insurance: Evidence from Medicare Advantage*

Many industries consist of large firms that compete in multiple geographic markets. Such overlap, defined as multimarket contact (MMC), may facilitate tacit collusion and soften competition. We examine the effects of MMC on health insurance prices and quality using comprehensive data on the Medicare Advantage (MA) market from 2008 through 2015. Our identification strategy exploits two plausibly exogenous changes to MMC: (1) out-of-market mergers; and (2) policy-driven changes in the benchmark rates of other markets. Our results consistently support the mutual forbearance hypothesis, where we find that prices are significantly higher and high-quality plans less pervasive as MMC increases.     

Tacit collusion, firm asymmetries and numbers: Evidence from EC merger cases

This paper estimates the implicit model, especially the roles of size asymmetries and firm numbers, used by the European Commission to identify mergers with coordinated effects. This subset of cases offers an opportunity to shed empirical light on the conditions where a Competition Authority believes tacit collusion is most likely to arise. We find that, for the Commission, tacit collusion is a rare phenomenon, largely confined to markets of two, more or less symmetric, players. This is consistent with recent experimental literature, but contrasts with the facts on ‘hard-core’ collusion in which firm numbers and asymmetries are often much larger.     

Collusion and leadership

The paper explores the role of price or quantity leadership in facilitating collusion. It extends the standard analysis of tacit collusion by allowing firms to make their strategic choices either simultaneously or sequentially. It is shown that price leadership indeed facilitates collusion by making it easier to punish deviations by the leader. In case of pure Bertrand competition, price leadership restores the scope for (perfect) collusion in markets where collusion would not be sustainable otherwise. When firms face asymmetric costs or offer differentiated products, price leadership can also enhance the profitability of collusion—in case of asymmetric costs, the less efficient firm must act as the leader. Finally, such leadership is less effective in case of Cournot competition since, following an aggressive deviation by the leader, the follower would rather limit its own output, making it more difficult to punish the deviation. Still, quantity leadership may enhance collusion when it is already somewhat effective in a simultaneous move setting.     

Multi-market collusion with territorial allocation

We develop a supergame model of collusion between price-setting oligopolists located in different markets separated by trade costs. The firms produce a homogeneous good and sustain collusion based on territorial allocation of markets. We first show, in a much more general framework than some earlier literature, that a reduction in trade costs can paradoxically increase the sustainability of collusion. Then we prove a new paradox in which the scope for collusion may be enhanced by an increase in the number of firms. The paper thus highlights several hitherto unknown theoretical implications of collusion under price competition.     

Fine-Tailored for the Cartel-Favoritism in Procurement

In this paper, we investigate the interaction between two firms, which are involved in a repeated procurement relationship modeled as a multiple criteria auction, and an auctioneer (a government employee) who has discretion in devising the selection criteria. Our main result is that favoritism substantially facilitates collusion. It increases the gains from collusion and contributes to solving basic implementation problems for a cartel of bidders operating in a stochastically changing environment. A most simple allocation rule where firms take turns in winning, independently of stochastic social preferences and firms’ costs, achieves full cartel efficiency (including price, production, and design efficiency). In each period the selection criteria is fine-tailored to the in-turn winner: the “environment” adapts to the cartel. This result holds true when the expected punishment is a fixed cost. When the cost varies with the magnitude of the distortion of the selection criteria (compared to the true social preferences), favoritism only partially shelters the cartel from the environment. We thus find that favoritism generally facilitates collusion at a high cost for society. Our analysis suggests some anti-corruption measures that could be effective in curbing favoritism and collusion in public markets. It also suggests that the much-advocated rotation of officials is likely to be counter-productive.     

An Anticompetitive Effect of Eliminating Transport Barriers in Network Markets

This paper examines the welfare effects of physically interconnecting two (network) markets that were previously separated. In each market a different set of capacity-constrained firms operate. Firms engage in a supergame and collude whenever it is rational for them to do so.We find that, under certain parametric restrictions, interconnection of the two markets reduces total welfare. The collusive horizon may extend from a single market to the overall integrated market. In such case, interconnection can be viewed as “exporting” collusion, rather than competition.      

From Internal to Network Labor Markets? Insights on New Promotion Processes from the Call Center Industry

Research on network forms of organization suggests that “business units” may be a more useful analytical unit than “firms” in understanding restructuring of internal labor markets. We find evidence for this proposition by analyzing promotion opportunities in 1760 call centers in sixteen countries. We find substantial differences in promotion opportunities internal to the unit versus elsewhere, related to the use of explicit versus tacit knowledge in performance evaluation, distinctions between unit‐specific and general‐firm knowledge, and network‐bridging organizational characteristics.     

COLLUSION AND FIGHTS IN AN EXPERIMENT WITH PRICE‐SETTING FIRMS AND ADVANCE PRODUCTION*

We present results from 50‐round duopoly and triopoly experiments. Firms decide repeatedly both on price and quantity of a perishable good. Each firm has capacity to serve the whole market. The stage game does not have an equilibrium in pure strategies. Most markets evolve either to monopolies as a consequence of bankruptcies or to collusion at the monopolistic price. Evolution is faster in markets with two than in those with three firms. Therefore, over time average price is lower with three than with two. Consumer surplus is higher with three firms, but efficiency is lower in markets with three firms.     

OUTPUT‐EXPANDING COLLUSION IN THE PRESENCE OF A COMPETITIVE FRINGE*

Following the structure of many commodity markets, we consider a few large firms and a competitive fringe of many small suppliers choosing quantities in an infinite‐horizon setting subject to demand shocks. We show that a collusive agreement among the large firms may not only bring an output contraction but also an output expansion (relative to the non‐collusive output level). The latter occurs during booms and is due to the strategic substitutability of quantities. We also find that the time at which maximal collusion is most difficult to sustain can be either at booms or recessions. The international copper cartel of 1935–39 is used to illustrate some of our results.     

On the relation between multimarket contact and service quality: Mutual forbearance or network coordination?

Research summary : We reconsider the relationship between multimarket contact and product quality in the airline industry by arguing that multimarket contact has both a negative mutual forbearance effect on quality and a positive network coordination effect on quality. Multimarket contact increases the frequency of contact between firms, and this anticipated future interaction promotes cooperation. In network industries, especially small firms may want to cooperate in order to increase the attractiveness of the composite product. By using size as a moderating variable, we indeed find a consistent positive effect of multimarket contact on product quality for small airlines. We show that this effect can be attributed to network coordination and that this effect generally dominates the negative mutual forbearance effect in a recent period. Managerial summary : Firms with sales in multiple geographical markets likely encounter each other with mutual respect (i.e., live and let live) because aggressive behavior in one market may lead to retaliatory responses in other markets. Such responses weaken competitive pressures on price and quality. Insofar these firms sell complementary products, they may however also coordinate and improve their joint product offering, resulting in better quality for the consumer. This paper shows that this positive effect of cooperation may dominate the negative competition‐reducing effect, depending on the size distribution of firms. The reason is that small or nondominant firms have a stronger incentive to produce compatible products than large or dominant firms with already a strong position in the (global) market. Copyright © 2015 John Wiley & Sons, Ltd.     

Market Power and Multimarket Contact: Some Evidence from the Spanish Hotel Industry

This paper analyses the effect of multimarket contact on firms’ behaviour. According to Bernheim and Whinston [1990], firms that meet in several markets for an infinite number of periods may find it profitable to redistribute market power among markets where they are operating. We present evidence supporting this prediction by using data from the Spanish hotel industry. Moreover, we also find that the omission of variables measuring multimarket contact creates a downward bias on the effect of concentration on prices. This result questions previous conclusions about the role of competition in industries where multimarket behaviour is expected.     

Why Do Suppliers Charge Larger Buyers Lower Prices?

The phenomenon of input suppliers charging larger buyer firms, relative to smaller buyer firms, lower prices is commonly explained in terms of supplier economies of scale, supplier competition for larger buyers, and the larger bargaining power of larger buyers. This paper provides an alternative explanation, and shows that the observed direction of differential pricing can benefit the supplier by lowering the level of tacit collusion its buyers can sustain in their output market. This result also provides a new mechanism through which a ban on price discrimination by input suppliers may lower consumer welfare.     

Cartel sustainability in retail markets: Evidence from a health service sector

This paper studies the role of cost asymmetries and product differentiation on cartel sustainability by drawing data from a failed retail cartel. Unlike the extensive theoretical literature, little empirical evidence exists on these relationships. First, we analyze cartel compliance and find that players are more likely to comply when cost is symmetric and own cost is high. Next, based on a structural model and counterfactual experiments, we show that a cartel price that satisfies all cartel members does not exist. This result indicates an inherent difficulty of sustaining collusion in retail markets with heterogeneous players. We also show that firm heterogeneities, especially product differentiation rather than cost asymmetries, hinder collusion more. Finally, we derive the level of patience (or the discount factor) required for cartel sustainability when firms split profits based on the Shapley value.     

Yardstick Competition, Franchise Bidding and Firms’ Incentives to Collude

Collusion seems to be a pervasive problem when regional monopoly rights are auctioned to private firms. This leads us to study whether firms may collude if the regulator uses yardstick competition to simulate competitive forces, and how collusion is affected when both schemes are used. Using an infinitely repeated game framework, we find that collusion is sustainable when firms are sufficiently patient under yardstick competition. An additional franchise bidding mechanism can even help firms sustain collusion when they are impatient. When temporary monopoly rights are assigned for sufficiently long periods of time, collusion may not be sustainable even when firms are patient.     

Price wars and price collusion in China's airline markets

In the absence of an effective antitrust law, both fare wars and price collusion have been pervasive in China's airline markets, causing concern for both airlines and consumers. A study of monthly airfare data from 2002 to 2004 confirms that fare wars occur periodically, as well as price collusion. Both tend to be short-lived. The fact that collusion is more likely to occur in January and April when demand is high, as revealed by China Eastern's and China Southern's price-war and collusion models, has been confirmed by interview information obtained from the airlines' sales managers. However, there is also evidence in these models suggesting that collusion can be more easily formed when demand is low. High airport concentration measured by the HHI may facilitate collusion in certain circumstances, but it may also lead to more price wars under other conditions. Concentration in both airports and routes does not appear to systematically affect the occurrence of fare wars and collusion in all the models estimated. We also reject the possibility that mutual forbearance due to multimarket contact plays any important anti-competitive role in China's airline markets.     

Detecting Collusion

Detection and deterrence of collusion are longstanding antitrust problems, made difficult because collusive arrangements are usually surreptitious. In this paper, I discuss factors that facilitate or inhibit collusive schemes, as well as circumstances where detection is possible. I describe how industrial organization economists diagnose collusion (both explicit and tacit) among firms.     

Modeling oligopolistic interaction

It is shown that standard versions of overt and tacit collusion under quantity-setting oligopoly are formally equivalent. The two approaches are combined to model collusive behavior when firms expect rivals to react to output changes. The combined model yields a structural equation for firm-level price-cost margins that is consistent with empirical studies using line-of-business data.     

ALTERNATING MONOPOLY AND TACIT COLLUSION*

This paper considers the use of the alternating monopoly strategy (AMS) as a (tacit) collusion device. We show that firms may choose this strategy in particular environments, when other collusive strategies are also feasible. In particular, we stress how the presence of an observable move (entry), distinct from the competitive stage (price setting), can serve as a coordination device, reducing monitoring costs in incomplete information environments. The paper thus shows that AMS may be preferable to the classic market sharing strategy (MSS) and in some cases it is the only collusive equilibrium.     

A partial identification framework for dynamic games

Empirical work on strategic interactions is often subject to the critique that equilibrium selection assumptions drive the results. We develop a framework for partially identifying parameters of dynamic games without equilibrium selection assumptions. Our framework relies on incentive compatibility constraints that incorporate game theoretical results on equilibrium payoff sets to bound the unknown continuation payoffs. We apply this framework to identify cost parameters in three dynamic games where collusion is a potential outcome. The identified set demonstrates the ease of sustaining collusion with patient firms, in low demand and when monitoring is perfect, and can also be used to detect collusion.