Civil antitrust sanctions and cartel stability

A simple model is used to examine the effects of accumulating civil damage liability on the stability of collusive agreements. We demonstrate that all collusive agreements have a built-in upper bound wherein it is no longer profitable to continue collusive activity. A consequence of this upper bound is that the well known "final period problem" comes into play leading to cartel instability. A modification of the initial model demonstrates how a statute of limitations on antitrust actions can mitigate or eliminate the final period problem. Finally, we discuss how the statute of limitations works in practice.     

Market Share Instability and the Dynamics of Competition: a Panel Data Analysis of Japanese Manufacturing Industries

This paper explores market share instability as a measure of market mobility. Using a newly constructed panel data set, we examine the determinants of the market share instability of leading firms in Japanese manufacturing industries. The findings suggest that there is a significant relationship between concentration and market share instability, and the market shares of leading firms are more stable in highly concentrated industries. We also provide evidence that industry growth has a significantly positive effect on market share instability.     

The bakers of Washington cartel: Twenty-five years later

Craig M. Newmark challenges the findings of a 1965 Federal Trade Commission decision and Economic Report that a price fixing cartel increased bread prices in the state of Washington from the mid-1950s to 1964. Newmark believes prices were higher during the cartel's existence because retailers in the west had higher margins and that bakers in the west had higher wages and higher normal profits than elsewhere in the country. Newmark ignores evidence that the cartel had set the higher retailer margins in Washington and that the labor costs and profits of Washington bakers were not higher than elsewhere. The Washington bakers had inflated distribution costs and excess capacity prior to the cartel's breakup. This result is commonplace when a cartel stimulates costly nonprice competition, so that the higher prices of the cartel members end up primarily in higher unit cost. Finally, Newmark claims that the reason prices fell in 1965 was the entry of a significant size price cutter, not the demise of the cartel. What Newmark characterized as a principal entrant was actually a tiny, two-man operation, with less than a 1.0 percent market share. The record shows that this entrant did not trigger the precipitous price decline occuring when the cartel was destroyed.     

Identifying Participants in a Price-fixing Conspiracy: Output & Market Share Tests Reexamined

If there is a cartel agreement among a subset of firms in an industry, it should be predicted that all firms in that industry will increase prices. Nevertheless, industry prices alone should not indicate that a particular firm is guilty of that conspiracy. According to the output test and its market share variant – proposed by Blair and Romano – if the output or the market share of the firm that claims to be innocent in the collusive activity rises in response to the price increase, that firm's claim should be accepted as true. Using a collusive variant of the dominant firm model, this paper shows that these are not robust tests to reveal either innocence or guilt, and characterizes cases where they may pardon a guilty firm (Type I error) or indict an innocent firm (Type II error). This paper also shows that a market share test can not be used to prove a dominant firm's intent for predatory pricing.     

Multi-Market Collusion with Demand Linkages and Antitrust Enforcement

This paper analyzes dynamic cartel formation and antitrust enforcement when firms operate in demand-related markets. We show that cartel prosecution can have a knock-on effect: bringing down a cartel in one market reduces profits and cartel stability and leads to the break-up of the cartel in the adjacent market. Cartel prosecution can also have a waterbed effect: disrupting a cartel increases cartel stability in the adjacent market and induces cartel formation in previously competitive markets. We discuss the impact of dynamic cartel formation on consumer surplus, explore antitrust spillovers, the optimal scope of antitrust interventions and cartel formation with local firms.     

Collusion in a price-quantity oligopoly

In the context of an infinitely repeated oligopoly game, we study collusion among firms that simultaneously choose prices and quantities. We compare a price cartel with a price-quota cartel and analyze when and why firms prefer the latter to the former. Output quota may be required to solve coordination and incentive problems when market demand is sufficiently elastic. If market demand is sufficiently inelastic, then the cartel faces a trade-off between increasing prices and the amount of costly overproduction. We find that a price cartel prices consistently below the monopoly price to mitigate excessive production. In this case, a quota arrangement allows firms to avoid overproduction and to sustain the monopoly price. From a policy perspective, our findings suggest that an overall price increase in conjunction with more stable prices and market shares is indicative of collusion in industries where production precedes sales and outputs are imperfectly observable.     

Optimal cartel trigger strategies and the number of firms

Recent empirical papers have analyzed collusion in the Joint Executive Committee in an attempt to determine which of several theories of cartel behavior is supported by the behavior of this 19th century railroad cartel. Non-parametric tests of whether high and low profit regimes followed a first-order Markov process when one controls for the number of firms support the theory of optimal collusion given by Abreu, Pearce, and Stachetti. Results on whether transition probabilities depend on the number of firms are inconclusive.     

Post-cartel tacit collusion: Determinants,consequences, and prevention

We experimentally investigate the determinants of post-cartel tacit collusion (PCTC), the effects of PCTC on market outcomes, and potential policy measures aimed at its prevention. PCTC occurs robustly with or without fines or leniency and is determined both by collusive price hysteresis and learning about cartel partners’ characteristics and strategies. As a result, it is also strongly related to the preceding cartel success. PCTC generates a downward bias in the estimated cartel overcharges. This threatens the effectiveness of deterrence induced by private damage litigation and fines imposed on colluding firms based on the overcharge. This bias further increases with preceding cartel stability such that especially more stable sets of colluding firms may be deterred less when PCTC is present. Rematching colluding subjects with strangers within a session prevents PCTC. This indicates that barring colluding managers from their posts could help impede PCTC in the field.     

Combining cartel penalties and private damage actions: The impact on cartel prices

In many countries antitrust enforcement by Competition Authorities through prosecution and the imposition of penalties is complemented in price-fixing cases by private damage actions, which should affect both cartel deterrence and the prices set by those cartels that do form. We show that the impact of combining penalties and damages on cartel prices is not clearcut, and depends on both the nature of the penalty regime and the way that damages are calculated. We demonstrate this by focusing on two ways of calculating damages that have been advocated in practice and two different forms of the widely used revenue-based penalty regime. When the simple form of revenue-based penalties is in force, the standard method of calculating damages worsens its harmful pricing effects, whereas the proposed alternative method of calculating damages can overturn them. When a more sophisticated form of revenue-based penalties is in operation, imposing damages will improve its beneficial pricing effects under both methods of damage calculation, but the alternative method is more effective. In all cases combining penalties and damages improves deterrence.     

Horizontal concentration and anticompetitive behavior in the central Canadian cement industry: testing arbitrage cost hypotheses

Consider a market with a small number of firms attempting to collude. If they successfully act as a dominant firm, they will raise price. This in turn will expand output by any fringe firms and thus reduce the market share of the colluding group. Thus, higher prices will decrease concentration over time. Here we test this hypothesis, using a modification of Spiller and Huang (1986) and data from the post-1974 Toronto cement market. The weight of the evidence indicates that market price has a negative effect on concentration, implying that the firms in this market act, with significant though limited, success as a cartel.     

The leniency rule revisited: Experiments on cartel formation with open communication

The experimental literature on antitrust enforcement provides robust evidence that communication plays an important role for the formation and stability of cartels. We extend these studies through a design that distinguishes between innocuous communication and communication about a cartel, sanctioning only the latter. To this aim, we introduce a participant in the role of the competition authority, who is properly incentivized to judge the communication content and price setting behavior of the firms. Using this novel design, we revisit the question whether a leniency rule successfully destabilizes cartels. In contrast to existing experimental studies, we find that a leniency rule does not affect cartelization. We discuss potential explanations for this contrasting result.     

Flagging cartel participants with deep learning based on convolutional neural networks

Adding to the literature on the data-driven detection of bid-rigging cartels, we propose a novel approach based on deep learning (a subfield of artificial intelligence) that flags cartel participants based on their pairwise bidding interactions with other firms. More concisely, we combine a so-called convolutional neural network for image recognition with graphs that in a pairwise manner plot the normalized bids of some reference firm against the normalized bids of any other firms participating in the same tenders as the reference firm. Based on Japanese and Swiss procurement data, we construct such graphs for both collusive and competitive episodes (i.e when a bid-rigging cartel is or is not active) and we use a subset of graphs to train the neural network such that it learns distinguishing collusive from competitive bidding patterns. With the remaining graphs, we test the neural network’s out-of-sample performance in correctly classifying collusive and competitive bidding interactions. We obtain a very decent average accuracy of around 95% or slightly higher when either applying the method within Japanese, Swiss, or mixed data (in which Swiss and Japanese graphs are pooled). When using data from one country for training to test the trained model’s performance in the other country (i.e. transnationally), predictive performance decreases (likely due to institutional differences in procurement procedures across countries), but often remains satisfactorily high. All in all, the generally quite high accuracy of the convolutional neural network despite being trained in a rather small sample of a few 100 graphs points to a large potential of deep learning approaches for flagging and fighting bid-rigging cartels.     

Stable heterogeneous cartels

We define a nation of cartel stability which allows firms to perceive the impact of their actions on overall competitiveness in the market. We demonstrate that in an industry with linear demand and diverse linearly increasing marginal cost functions a stable cartel always exists. Furthermore, we examine uniqueness and size of such cartels as well as the impact of cost and demand conditions on their characteristics. In particular, we establish that the most efficient firms will be in the cartel while the less efficient ones will remain outside.     

The impact of external forces on cartel network dynamics: Direct research in the diamond industry

This paper describes the impact of external environmental forces on cartel networks. Using a case research approach, this report examines two leading business networks within one industry, over time. The results suggest that (a) bargaining power of intermediaries increases with the advent of new and powerful actors, (b) process activities that cartels previously controlled are being outsourced to new actors sometimes based in developing countries, (c) other actors are acquiring resources once dominated by a cartel, (d) external forces triggered by the illegal diamond trade, such as international regulatory constraints, no longer favour cartels like De Beers, and (e) over time, these and additional environment factors are forcing actors like De Beers who perform rigid process activities to become more flexible. For example, forces are moving cartels which relied previously on hand-picked intermediaries in highly controlled networks to market their products to adopt a flexible market-focused expansion of operations in retail contexts.     

The impact of the 2002 reform of the EU leniency program on cartel outcomes

The objective of this study is to empirically assess whether the 2002 reform of the EU leniency program, which brought the EU leniency policy much closer to the US policy, has increased the European Commission’s capability to destabilize cartels while making prosecution more efficient. More specifically, relying on a difference-in-difference approach, we estimate the impact of the 2002 reform on cartel duration, fines before and after applying leniency reductions and duration of investigation. We find that the 2002 reform decreased cartel duration by about 87 percent, but did not significantly affect the other outcome variables. Thus, our findings seem to suggest that the 2002 reform has improved the cartel-destabilizing effect of the EU leniency program, without enhancing however its effectiveness in prosecuting cartels.     

The Small Firm in a Quantity Choosing Game: Some Experimental Evidence

We demonstrate with a grim trigger strategy that the small firm should be more willing to collude tacitly as its market share declines; large firms should be less willing to cooperate. The small firm is not a maverick. The intensity of rivalry between two firms with asymmetric market shares is studied in experimental markets. Treatments give duopolists (1) 50% shares, (2) a 60 or 40% share, and (3) an 80 or 20% share. Choices for the small firm in the latter treatments are not significantly larger than the collusive choice. Irrespective of relative size, firms in all three market environments exhibit collusive behavior.     

Examining models of collusion: The market for lysine

We compare the experience with collusion in the market for lysine with the predictions of theory. The lysine market provides an ideal setting following the confessions of cartel participants in antitrust investigations. Data availability allows demand and cost functions to be estimated and observed mark-ups compared with predictions. We find that several integral aspects of collusion in the lysine market are not adequately addressed in the literature: the dynamics associated with entry and investment; persistent asymmetries between firms; the cartel's bargaining problem; and the existence of cheating in equilibrium. These issues are likely to have much wider applicability beyond the lysine market.     

Internal cartel stability with time-dependent detection probabilities

To account for the illegal nature of price-fixing agreements, per-period detection probabilities that can vary over time are introduced in a dynamic oligopoly. The resulting ICCs for internal cartel stability indicate that for discount factors up to 10% per-period detection probabilities of 5% are needed to reduce the number of cartel members by 50%. For the special case of stationary supergames with constant per-period detection probabilities p elegant rules emerge: internal cartel stability requires the discount factor to increase with 100 × p / (1 − p) percent while a fixed fine of 100 × (1 − p) / p percent of incremental cartel profits is required for making the ICC always binding.     

The Effect of Bid Rigging on Prices: A Study of the Highway Construction Industry

This paper examines the effect of multimarket contact in afirst price sealed bid government procurement auction market. It investigates whether bidprices in the highway construction industry are related to conditions that favor the formation of a cartel.Repeated contacts among firms are found to have a significantly positive effect on the winning low bidwhich leads to higher profit. Further, rivalry among few firms tends to exacerbate the multimarket effect.The results in this study additionally support the recent theoretical predictions that collusion isbetter sustainable during economic downturns.     

Leaders,laggards, and the pursuit of foreign knowledge

This paper analyzes how firms in different technological and market share positions use foreign R&D to augment their technological capabilities. Technology transfer issues and absorptive capacity arguments are examined to analyze the different technological capabilities of leading and lagging firms. In addition, a new strategic rationale (in terms of non‐dominant market share firms) that has not been considered in prior studies analyzing knowledge‐seeking FDI is offered. From a panel dataset which includes information on all foreign R&D investments made by publicly traded Japanese manufacturing firms (from 1974 to 1994), I show that Japanese firms investing in foreign R&D tend to be the non‐dominant market share firms, but also the technologically leading firms across fairly diverse industries. By considering both the technological and market share positions of firms, this study reveals important characteristics that influence when firms use foreign R&D as part of a strategy to augment their technological capabilities. Copyright © 2005 John Wiley & Sons, Ltd.