Information about Collusion

Competition law
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History of competition law Monopolization Coercive monopoly Natural monopoly Barriers to entry Market power SSNIP test Relevant market Merger control
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Collusion Formation of cartels Product bundling and tying Refusal to deal Exclusive dealing Bid rigging Dividing territories Conscious parallelism Price fixing Predatory pricing Misuse of patents and copyrights
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United States Sherman Antitrust Act Clayton Antitrust Act Robinson-Patman Act Federal Trade Commission Act Essential facilities doctrine Noerr-Pennington doctrine Rule of reason Europe European Community competition law Irish Competition Law Competition Act 1998 (U.K.) Australia Trade Practices Act 1974
Enforcement authorities and organizations
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Collusion is a term to refer to acts of cooperation or collaboration among rival entities.

About

In the study of economics and market competition, "collusion" takes place within an industry when rival companies cooperate for their mutual benefit. Collusion most often takes place within the market form of oligopoly, where the decision of a few firms to collude can significantly impact the market as a whole. Cartels are a special case of explicit collusion. Collusion which is not overt, on the other hand, is known as tacit collusion.

Variations

According to neoclassical price-determination theory and game theory, the independence of suppliers forces prices to their minimum, increasing efficiency and decreasing the price determining ability of each individual firm. If firms collude to increase prices as a cooperative, however, loss of sales is minimized as consumers lack alternative choices at lower prices. This benefits the colluding firms at the cost of efficiency to society.

One variation of this traditional theory is the theory of kinked demand. Firms face a kinked demand curve if, when one firm decreases its price, other firms will follow suit in order to maintain sales, and when one firm increases its price, its rivals are unlikely to follow, as they would lose the sales' gains that they would otherwise get by holding prices at the previous level. Kinked demand potentially fosters supra-competitive prices because any one firm would receive a reduced benefit from cutting price, as opposed to the benefits accruing under neoclassical theory and certain game theoretic models such as Bertrand competition.

Characteristics

Practices that facilitate tacit collusion include:

• Uniform prices
• A penalty for price discounts
• Advance notice of price changes
• Information exchanges
• Swaps and exchanges

Examples

Collusion is largely illegal in the United States, Canada and most of the EU due to antitrust law, but implicit collusion in the form of price leadership and tacit understandings still takes place. Several recent examples of collusion in the United States include:

• Andrew Malyi and market division among manufacturers of heavy electrical equipment in the 1960s.
• An attempt by Major League Baseball owners to restrict players' salaries in the mid-1980s.
• Price fixing within food manufacturers providing cafeteria food to schools and the military in 1993.
• Market division and output determination of livestock feed additive by companies in the US, Japan and South Korea in 1996.

There are many ways that implicit collusion tends to develop:

• The practice of stock analyst conference calls and meetings of industry almost necessarily cause tremendous amounts of strategic and price transparency. This allows each firm to see how and why every other firm is pricing their products.
• If the practice of the industry causes more complicated pricing, which is hard for the consumer to understand (such as risk-based pricing, hidden taxes and fees in the wireless industry, negotiable pricing), this can cause competition based on price to be meaningless (because it would be too complicated to explain to the customer in a short advert). This causes industries to have essentially the same prices and compete on advertising and image, something theoretically as damaging to a consumer as normal price fixing.

Barriers

There are significant barriers to collusion, however, under most circumstances. These include:

• The number of firms: as the number of firms in an industry increases, it is more difficult to successfully organize and communicate.
• Cost and demand differences between firms: if costs vary significantly between firms, it may be impossible to establish a price at which to fix output.
• Cheating: there is considerable incentive to cheat on collusion agreements; though lowering prices might trigger price wars, in the short term the defecting firm may gain considerably.
• Potential entry: new firms may enter the industry, establishing a new baseline price and eliminating collusion (though anti-dumping laws and tariffs can prevent foreign companies entering the market).
• Economic recession: an increase in average total cost or a decrease in revenue provides incentive to compete with rival firms in order to secure a larger market share and increased demand.

References

• Vives, X. (1999) Oligopoly pricing, MIT Press, Cambridge MA (readable; suitable for advanced undergraduates.)
• Tirole, J. (1988) The Theory of Industrial Organization, MIT Press, Cambridge MA (An organized introduction to industrial organization)
• Tirole, J. (1986), "Hierarchies and Bureaucracies", Journal of Law Economics and Organization, vol. 2, pp.181-214.
• Tirole, J. (1992), "Collusion and the Theory of Organizations", Advances in Economic Theory: Proceedings of the Sixth World Congress of the Econometric Society, ed by J.-J. Laffont. Cambridge: Cambridge University Press, vol.2:151-206.

	Topics in game theory
Definitions	Normal form game Extensive form game Cooperative game Information set Preference
Equilibrium concepts	Nash equilibrium Subgame perfection Bayesian-Nash Perfect Bayesian Trembling hand Proper equilibrium Epsilon-equilibrium Correlated equilibrium Sequential equilibrium Quasi-perfect equilibrium Evolutionarily stable strategy Risk dominance
Strategies	Dominant strategies Mixed strategy Tit for tat Grim trigger Collusion
Classes of games	Symmetric game Perfect information Dynamic game Repeated game Signaling game Cheap talk Zero-sum game Mechanism design Stochastic game Nontransitive game
Games	Prisoner's dilemma Traveler's dilemma Coordination game Chicken Volunteer's dilemma Dollar auction Battle of the sexes Stag hunt Matching pennies Ultimatum game Minority game Rock, Paper, Scissors Pirate game Dictator game Public goods game Nash bargaining game Blotto games War of attrition
Theorems	Minimax theorem Purification theorems Folk theorem Revelation principle Arrow's theorem