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.     

FARSIGHTED COALITIONAL STABILITY OF A PRICE LEADERSHIP CARTEL

This paper analyzes the farsighted behaviour of firms that form a dominant price leadership cartel. We consider stability concepts such as the farsighted core, the farsighted stable sets, and the largest consistent set. We show that: (i) the farsighted core is either an empty set or a singleton set of the grand cartel; (ii) any Pareto efficient cartel is itself a farsighted stable set; and (iii) the set of cartels in which fringe firms enjoy higher profits than the firms in the minimal Pareto efficient cartel is the largest consistent set.     

Ratifiability of efficient collusive mechanisms in second-price auctions with participation costs

We investigate whether efficient collusive bidding mechanisms are affected by potential information leakage from bidders' decisions to participate in them within the independent private values setting. We apply the concept of ratifiability introduced by Cramton and Palfrey [Cramton, P.C., Palfrey, T.R., 1995, Ratifiable mechanisms: Learning from disagreement, Games Econ. Behav. 10 (2), 255–283] and show that when the seller uses a second-price auction with participation costs, the standard efficient cartel mechanisms such as pre-auction knockouts analyzed in the literature will not be ratified by cartel members. A high-value bidder benefits from vetoing the cartel mechanism since doing so sends a credible signal that she has high value, which in turn discourages other bidders from participating in the seller's auction.     

Firm-specific information and explicit collusion in experimental oligopolies

We experimentally study the effect of information about competitors’ actions on cartel stability and firms’ incentives to form cartels in Cournot markets. As in previous experiments, markets become very competitive when individualized information is available and participants cannot communicate. In contrast, when communication is possible, results reverse: markets become less competitive and cartels become more stable when individualized information is available. We also observe that the extra profits that firms obtain thanks to the possibility to communicate are higher when individualized information is present, suggesting that firms have greater incentives to form cartels in that situation.     

Collusive behaviour under cost asymmetries when firms compete in supply functions

This paper investigates the effect of cost heterogeneity in cartel formation and its sustainability over time when firms compete in supply functions under uncertainty. We find that cartel formation and collusion sustainability are hindered as cost differences increase. Efficiency losses caused by collusive behaviour are shown to decrease as asymmetry increases and, therefore, welfare losses also decrease. We compare our results with those obtained under Cournot and Bertrand competition.     

Cartel Stability and Economic Integration

This paper revisits the notion that economic integration—modeled as a reduction of trade costs—may be anticompetitive, in the sense that it may reinforce the ability of an international cartel to maintain a collusive understanding about staying out of each other’s markets. The paper is novel in terms of introducing ad valorem and fixed trade costs in addition to the customary unit trade costs. It is shown that an anticompetitive effect, found for reductions in unit trade costs, may disappear once trade costs are ad valorem or fixed.     

COMPETITION POLICY AND CARTEL SIZE

This article examines endogenous cartel formation in the presence of a competition authority. Competition policy is shown to make the most inclusive stable cartels less inclusive. In particular, small firms that might have been cartel members in the absence of a competition authority are no longer members. Regarding the least inclusive stable cartels, competition policy can either decrease or increase their size and, in the latter case, the collusive price can rise.     

Optimal cartel trigger price strategies

A dynamical model of industry equilibrium is described in which a cartel deters deviations from collusive output levels by threatening to produce at Cournot quantities for a period of fixed duration whenever the market price falls below some trigger price. In this model firms can observe only their own production level and a common market price. The market demand curve is assumed to have a stochastic component, so that an unexpectedly low price may signal either deviations from collusive output levels or a “downward” demand shock.     

COMPETITIVENESS AND STABILITY OF COLLUSIVE BEHAVIOR

We investigate the relationship between the degree of competition and the stability of collusive behaviour, by introducing the element of relative performance in the objective functions of the firms. We show that an increase in the degree of competition destabilizes the collusion. This relation differs starkly in the standard symmetric Cournot and Bertrand duopoly models, with the former being more unstable than the latter.     

Oil market share dynamics: A Markov chain analysis of consumer and producer adjustments

We develop an “optimal market share rule” model of cartel behavior which when applied to the OPEC cartel appears capable of explaining its stability and responses to changed market events. In particular, by attaching importance to market shares based approximately on costs, OPEC members can by maintaining optimal shares deter deviant member attempts to break cartel rules. After a thorough discussion of the theory, the model is tested empirically using a Markov probability model. The estimated Markov transition matrix is further decomposed into what Theil has called the exchange matrix and the mean passage matrix. Dynamic adjustment processes in the market are revealed by the latter while an emerging pattern of OPEC member surveillance of consumers is revealed by the former which facilitates cartel stability. Inspection of these matrixes further suggests that after the formation of OPEC there is evidence of less potential for producer conflict while there appears more evidence for consumer conflict. While these results must be tentative in view of the fact that they have been estimated using a simplified two consumer — two producer model and limited data, it is argued that the results are highly suggestive and the approach in this study can be extended to cover all producer and consumers, and can be integrated into a complete model of the world oil market.     

CARTEL PROBLEMS: THE INCENTIVE TO LIE ABOUT COSTS*

Osborne noted five problems a cartel has in restricting output to the mutual benefit of its members. Here, we examine one of these: the problem of location of the contract surface. We first model the situation where one firm is able to mislead cartel members about the level of its cost function. We show there is often, in theory, an incentive to do this and thereby increase profit if marginal costs are rising, though not if they are falling. We go on to examine the case where both firms cheat, and to consider possible solutions the cartel might adopt.     

Technology and Cartel Stability under Vertical Differentiation

The interplay between R&D activity and cartel stability is investigated in a vertical differentiation framework with convex costs. The behaviour of firms' critical discount factors as the curvature of the cost function varies is investigated, considering either price- or quantity-setting behaviour. In order to stabilize collusion, firms are better off playing à la Cournot and supplying the non-cooperative qualities. There emerges a tradeoff between the reduction of the convexity of the cost function and the associated increase in marginal cost. The decision to carry out joint or independent ventures in research is also investigated, showing that such a decision is non-monotone in intertemporal discounting. Policy measures are then briefly discussed.     

Endogenous cartel formation: Experimental evidence

In a Bertrand-oligopoly experiment, firms choose whether or not to engage in cartel-like communication and, if so, they may get fined by a cartel authority. We find that the four-firm industries form cartels more often than the duopolies because they gain less from a hysteresis effect after cartel disruption.     

Cartel sustainability with vertical product differentiation: Price versus quantity competition

In the context of a vertically differentiated duopoly, we analyse the influence of the degree of differentiation on cartel sustainability, under both price and quantity competition. We find that, under both Bertrand and Cournot competition, the effect of vertical product differentiation on sustainability of the collusive equilibrium is unclear. It is shown that, given a degree of differentiation, price collusion is more sustainable than quantity collusion.     

ON THE SUSTAINABILITY OF COLLUSION IN A DIFFERENTIATED OLIGOPOLY WITH A CARTEL AND A FRINGE

We discuss the effects of the existence of non‐colluding (fringe) firms on cartel sustainability. We obtain, using trigger strategies, that with product differentiation collusion is always more easily sustained when firms compete in prices than when firms compete in quantities. This is true basically because (i) price competition is more intense than quantity competition, and (ii) fringe firms exacerbate the fact that cartel firms have more incentives to deviate from the agreement under quantity competition. This result reverses previous findings where, in the absence of fringe firms, product differentiation plays a crucial role in determining the effectiveness of price or quantity competition in sustaining collusion.     

Do Antitrust Laws Facilitate Collusion? Experimental Evidence on Costly Communication in Duopolies*

Bertrand supergames with non‐binding communication are used to study price formation and stability of collusive agreements on experimental duopoly markets. The experimental design consists of three treatments with different costs of communication: zero‐cost, low‐cost and high‐cost. Prices are found to be significantly higher when communication is costly. Moreover, costly communication decreases the number of messages, but more importantly, it enhances the stability of collusive agreements. McCutcheon (1997) presents an interesting application to antitrust policy by letting the cost of communication symbolize the presence of an antitrust law that prohibits firms from discussing prices. Although our experimental results do not support the mechanism of McCutcheon's (1997) argument, the findings point in the direction of her prediction that antitrust laws might work in the interest of firms.     

On prices’ cyclical behaviour in oligopolistic markets

We revisit the discussion about the relationship between price’s cyclical features, implicit collusion and the demand level in an oligopoly supergame where a positive shock may hit demand and disrupt collusion. The novel feature of our model consists in characterising the post-shock noncooperative price and comparing it against the cartel price played in the last period of the collusive path, to single out the conditions for procyclicality to arise both in the short and in the long-run. This poses an issue in terms of an antitrust agency’s ability to draw well defined conclusions on the firms’ behaviour after the occurrence of the shock, with particular reference for the litigation phase after a cartel breakdown.     

Delivered pricing and endogenous delegation of contract type

This article demonstrates for the first time that owners will delegate the location decision under delivered pricing using a relative performance contract rather than a market share contract. It goes on to evaluate the welfare consequences of this demonstration. With linear production costs and simultaneous location, both incentive contracts reduce welfare, but the chosen relative performance contract reduces it by less. Yet, with linear costs and sequential location, the chosen relative performance contract reduces welfare by more. Finally, with enough convexity in production costs, welfare can be improved by the chosen relative performance contracts.     

A note on cartel stability and endogenous sequencing with tacit collusion

We use the concept of cartel stability defined by d’Aspremont et al. (Can J Econ 16(1):17–25, 1983) to obtain that the sequence of play between the cartel and the fringe affects cartel stability in a quantity-competition setting where firms tacitly collude. We also prove that an endogenous sequence of play between a cartel and a fringe depends on the discount factor. If the discount factor is large enough, the cartel and the fringe simultaneously choose quantities since the stable cartel may contain more firms under simultaneous play than under cartel leadership. This is due to the fact that under simultaneous play cartel firms have incentives to participate in the cartel because otherwise no collusion is possible.      

When imperfect collusion is profitable

This paper studies cartel stability under the assumption that member firms can choose intermediate degrees of collusion as well as the joint-profit-maximizing solution in determining the quota to be produced by each firm. After showing that firms can increase the number of participants by decreasing the degree of collusion, I prove that individual members' profits are maximized when firms choose a (possibly low) degree of collusion such that all firms in the industry want to take part in the cartel. More precisely, if the number of firms in the industry is four or less, then all of them want to take part in the cartel even if the maximum degree of collusion is chosen (i.e., the monopoly output is produced); if the number of firms is greater than four, firms will still create an industry-wide cartel but they will produce a higher quantity than the monopoly output.