TACIT COLLUSION

1. TACIT COLLUSION

2. TACIT COLLUSION • Firms agree to play a certain strategy without explicitly saying so. • They may stay within the law but collude tacitly by monitoring each other’s prices and keeping them the same.

3. PLAN OF THE PRESENTATION • Basic model • Structural factors that facilitate/ hinder collusion: --Concentration --Entry barriers

4. Basic model • n identical firms with same marginal cost: c and discount factor: δ • Homogeneous product, so the customers all buy from the low price firm. No capacity constraint.

5. Basic model • In each period t=1,2,3etc firms fix prices. Payoffs are contingent upon their own action, and also the actions of their rivals. • Infinitely repeated game: -- repeated interaction is crucial --under a nonrepeated game or a finitely repeated game all firms will choose competitive price c

6. Basic model • Equilibrium strategy: trigger strategy

7. Basic model • Payoff from coordinating on collusive price: • Payoff from deviating:

8. Basic model • Coordinating is more profitable than deviating if: • Rewrite:

9. Basic model • Collusion is sustainable if: --The cost by deviating is big enough: sufficient weight on future profits --Players are patient enough :threshold for discount factor

10. Basic model • As a result of non-cooperative game, communication is not necessary. • However, communication may help in adjusting price to shocks without triggering a price war, a price between c and can be sustainable.

11. Relevant factors for collusion • Number of competitors: coordination is difficult with more parties involved. • Symmetry helps collusion, something about the assumptions in the basic model. • Multi-market contacts facilitate collusion.

12. Number of competitors • The smaller the number of participants, the easier to sustain collusion. Is ½ if n=2, 2/3 if n=3 • Easier for detecting deviation. Immediate punishment is crucial. • Higher degree of concentration facilitates collusion.

13. Relevant factors • Entry barriers facilitate collusion. --With more firms entering to the market, n increases, the stream of future profit declines. --”Hit and Run”

14. Relevant factors • Demand growth: • Collusion is easier in growing markets while more difficult in declining ones. • With growth rate g

15. Symmetry helps collusion • 1. Market shares: • A large firm (>1/2)and a small firm in the market. • IC for the large firm: • IC for the small firm:

16. Symmetry helps collusion • 2.Cost asymmetries leave collusion less scope: • Difficult to agree on pricing policy. • Difficult to agree on allocation of collusive profits under TACIT condition. • Even if the two obstacles above overcome, low cost firm still tends to deviate.

17. Symmetry helps collusion • Two firms with equal market share, and rigid demand D if p<or= v • IC for high cost firm • IC for low cost firm

18. Symmetry helps collusion • 3. discount factor • The firm with a smaller discount factor is more likely to deviate, for example, one in financial stress. • 4. Effect of differentiation of products is obscure. • Lower profit from deviation. • Weaker punishment.

19. Multi-market contact • Frequency of interaction between firms is increased. • Soften asymmetries in individual market. • Example: a duopoly situation, two markets A, B with the same collusive profit, one play has ¼ market share in A, ¾ in B.

20. Multi-market contact • If the firm computes it’s profit from the two markets together, it will stick to this path: