b4-collusion

Public Policy Towards Oligopoly

Collusion and Legal Framework

  • Per Se Rule: Collusion is considered illegal per se.

    • No need to prove conspiracy.

    • No need to prove anti-competitive effects.

    • Detection of collusion is the sole consideration.

Differences Between Legal Rules

  1. Non-normative Aspect of Collusion

    • Collusion is never seen as 'normal industrial development.'

  2. Detection Issues

    • Monopoly is easy to detect, while collusion is more complex.

Interstate Circuit - Conscious Parallelism

Background Facts

  • Market Dynamics

    • Dominated first-run theatres in the region.

    • Facing competition from second-run theatres.

    • Highly concentrated movie distributor market.

Actions Taken by Interstate Circuit (IC)

  • IC sent letters to distributors stating:

    • Minimum second-run price for first-run films.

    • First-runs should not be part of double features.

  • All letters 'cc'ed to other distributors, leading to independent agreements.

Incentives for Distributors

  • Independent Agreement: Agreeing unilaterally results in competitive disadvantages.

  • Group Agreement: Leads to price fixing.

Conscious Parallelism Definition

  • Occurs when firms engage in actions that:

    1. Would harm profit if taken unilaterally.

    2. Increase profits when coordinated.

  • Evidence of Collusion: Considered as de facto evidence of collusion.

  • Relates to the Prisoners’ Dilemma framework.

Post-WWII Duopoly Case Study: GE and Westinghouse

Market Characteristics

  • Homogeneous Product: Fridges were similar in quality/attributes.

  • Pricing Dynamics: Generally, P = mc, except in brief instances with P > mc.

Competitive Strategies

  • Price Guarantee: GE promised a refund of price difference if prices were lowered post-purchase.

  • Westinghouse made an identical announcement, signaling coordinated behavior.

Collusion Dynamics and the Prisoners' Dilemma

Key Insights

  • Discounting: Value of a dollar tomorrow is less than today (δ < 1).

  • Payoff structure for player i in collusive scenarios:

    • Payoff formula: P∞t=0 δtui(t) where ui(t) is the period t payoff.

  • Grimm Trigger Strategy: Play cooperatively until the rival defects, then play defectively indefinitely.

Conditions for Supporting Collusion

  • Support for collusion arises when:

    • The difference between joint profits and colluding profits must suffice based on discount rate and future expected returns.

Relevance of Prisoners’ Dilemma in Oligopolistic Markets

  • For firms maximizing their profits:

    • Individual profit maximization leads to MRi = mci.

    • Industry profit-maximizing condition results in MRI < MRi, indicating πD > πC > πE.

Asymmetrical Marginal Costs

  • Asymmetric marginal costs lead to discrepancies in pricing and competition strategies.

Problems Sustaining Collusion

Challenges in Successful Collusion

  • High prices create entry incentives into the market (Case study: 1897 NYC grain elevators).

Imperfect Monitoring Issues

  • Firms may set outputs based on observed prices that include error margins (P(Q) + ǫ).

  • Consequences of Noisy Signals: May lead to incorrect punishments for non-cheating or unpunished cheating, impacting collusion stability.

Sustaining Collusion in OPEC

Market Characteristics

  • Lack of symmetry among firms due to different production costs and product differentiations (Low vs. High sulfur oil).

Strategic Considerations

  • Renegotiation post refinery upgrades affects collusion sustainability.

  • Discounting and the balance between immediate profits versus delayed market entries are critical.