Definition and Scope of Collusive Practices

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Definition and Scope of Collusive Practices
People of the same trade seldom meet
together, even for merriment or diversion, but
the conversation ends in conspiracy against the
public, or in some contrivance to raise prices.
Adam Smith, The Wealth of Nations
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What is collusion?

• Collusion means an arrangement (formal or
  informal) among, or on behalf of, enterprises in
  the same line of business which is designed to
  limit competition among them (Douglas Greer,
  1992).
• Successful collusion occurs when firms in an
  industry behave in such a way that, given the
  relevant supply and demand functions (including
  those of rivals), the combined profits of the
  entire set of firms is maximized (George Stigler,
  1961).

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A cartel is a formal system of coordination among
rival sellers. For example , a cartel might
establish (based on negotiation among members)
prices, output quotas, or restricted selling
territories.
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Incentive to engage in coordinated action among
sellers

• Failure among firms in tightly concentrated
  market structures could mean mutually destructive
  price wars.
• Seller coordination can be very profitable. Note
  that our duopolists, by action as joint
  monopolists, could have increased their payoff by
  50 each.

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Factors affecting the feasibility of (sustained)
coordinated action among rival sellers

• Number of sellers
• Number of buyers
• Similarity of costs
• Product differentiation (or lack thereof).

Collusion tends to be ineffective against large
buyers
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Modus operandi of seller coordination

• Price LeadershipExamples Northwest Airlines was
  price leader on the LA-Minneapolis routeit
  disclosed periodic adjustments in fares to its
  rival (US West) via a jointly used computerized
  reservation system. GE set turbine generator
  prices by applying a multiplier to number
  published in a pricing book. Westinghouse could
  then predict GEs bids by advance knowledge of
  the multiplier.
• Use of a Joint Sales AgencyExamples DeBeers is
  a joint sales for diamond mining units worldwide.
  Also, the Southeastern Conference and the
  National Football League.

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Modus operandi of seller coordination, continued

• Bid riggingExample The Tennessee paving
  conspiracy
• Geographic Market DivisionExample Basing point
  pricing in the steel industry
• Customer Allocation
• Focal Point Pricing This is a system of tacit
  coordination . A set of retail prices(such as
  9.95 or 3.95as opposed to, say, 9.99 or
  3.99) are established as focal pointsthat is,
  a method of silently communicating to rivals that
  you wish to avoid price competition where these
  items are concerned.