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Market Transparency and Competition Policy in Imperfectly Competitive Markets

Market Transparency and Competition Policy in Imperfectly Competitive Markets. Peter Møllgaard Copenhagen Business School Presentation at ENCORE workshop, June 5, 2003 . Outline. Generalities Price transparency – Direct effect Characteristics transparency – Indirect Policy conclusions.

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Market Transparency and Competition Policy in Imperfectly Competitive Markets

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  1. Market Transparency and Competition Policy in Imperfectly Competitive Markets Peter Møllgaard Copenhagen Business School Presentation at ENCORE workshop, June 5, 2003

  2. Outline • Generalities • Price transparency – Direct effect • Characteristics transparency – Indirect • Policy conclusions Market Transparency and Competition Policy

  3. Outline • Generalities • Transparency • Full collusion • Partial collusion • Price transparency – Direct effect • Characteristics transparency – Indirect • Policy conclusions Market Transparency and Competition Policy

  4. 1. Generalities: Transparency • Transparency – a buzzword • Two kinds of transparency • Price transparency : easy comparison of prices • Characteristics transparency: comparison of qualities (horisontal product differentiation). • Two effects: • Direct: how imminent is detection? • Indirect: how severe is punishment? Market Transparency and Competition Policy

  5. 1. Generalities: Full collusion • Full collusion sustainable by Nash triggers: • Proposition: Market Transparency and Competition Policy

  6. 1. Generalities: Partial collusion • Maximal price • Sustainable by Nash trigger strategy • Increasing in iscount factor • U-shaped in measure of product differentiation •  Market Transparency and Competition Policy

  7. 1. Generalities: Partial collusion Market Transparency and Competition Policy

  8. Outline • Generalities • Price transparency – Direct effect • Detection: lag and uncertainty • A Concrete Case • Characteristics transparency – Indirect • Policy conclusions Market Transparency and Competition Policy

  9. 2. Price transparencyFull collusion • Detection lag : ´() > 0 • Later punishment makes collusion more difficult. • Uncertain detection: Prob(detect) =  • ´() < 0 • Higher risk of being detected prevents cheating. Market Transparency and Competition Policy

  10. 2. Price transparencyPartial collusion  = .7  = .5; .6; .7 Market Transparency and Competition Policy

  11. 2. Price transparencyPartial collusion 0.5  = .53  = .9; .95; .958401 0.4 Price 0.3 0.2 0 0.2 0.4 0.6 0.8 1 Probability of detection Market Transparency and Competition Policy

  12. 2. Price Transparency: A Concrete Case • Ready mixed concrete in Århus • DCA made public prices and secret discounts • Input prices stable • Low capacity utilization Market Transparency and Competition Policy

  13. Outline • Generalities • Price transparency – Direct effect • Characteristics transparency – Indirect • Comparability of products • The indirect effect at play • Policy conclusions Market Transparency and Competition Policy

  14. 3. Characteristics transparency • Measure of transparency (). • Ease of comparability of product characteristics. • T´() > 0 • D´()>0 • Which effect dominates? • Proposition from before! Market Transparency and Competition Policy

  15. 3. Characteristics transparency • When transparency is low, improved transparency makes full collusion more difficult • ´() > 0 when  [0,0.77) • Temptation is more elastic than deterrence. • When transparency is high, improved transparency makes full collusion easier • ´() < 0 when   (0.77,1). Market Transparency and Competition Policy

  16. 3. Characteristics transparency • Extentions: • Abreu optimal symmetric punishments. • Full transparency is always optimal. • More firms: • Optimal degree of transparency is increasing in number of firms • Four are few, six are many Market Transparency and Competition Policy

  17. Outline • Generalities • Price transparency – Direct effect • Characteristics transparency – Indirect • Policy conclusions • Transparency packages • IT and internet Market Transparency and Competition Policy

  18. 4. Policy conclusions:Transparency packages • Maximal sustainable price • Function of • Lag () and uncertainty () [translate into ] • Characteristics transparency () • If  is low: • Max price will increase with price transparency but decrease with characteristics transparency • If  is already high, • Max price will increase with both!!! Market Transparency and Competition Policy

  19. 4. Policy conclusions:IT and WWW • Info may be encoded, encrypted etc. • Makes detection of collusion more difficult. • Industry chat rooms! • Automata! • Quick price response = clear and present danger. Market Transparency and Competition Policy

  20. 4. Policy conclusions:IT and WWW • It is not the information as such, it is how it is used that matters. • Study who owns and organizes the site ! • but beware of undercover agents. Market Transparency and Competition Policy

  21. FINE Market Transparency and Competition Policy

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