Lecture16_Collusion_Econ121_Fall2010 (2)

Lecture16_Collusion_Econ121_Fall2010 (2) - Lecture 16...

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Click to edit Master subtitle style  2/2/11 Lecture 16 Collusion Econ 121: Industrial Organization UC Berkeley Fall 2010 Prof. Cristian Santesteban
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 2/2/11 Overview Coordinated Behavior Airline Case Study Cartel Stability
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 2/2/11 Bertrand with Capacity Constraints – Last Words Edgeworth Cycles No pure strategy equilibria if capacities are asymmetric Consider the case where p1 = p2 = p > Pcrit = P(k1+k2) Does firm 1 (large firm) have an incentive to deviate?
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 2/2/11 Bertrand with Capacity Constraints – Last Words Yes, lower price. How will firm 2 respond? Match price. Does firm 1 have an incentive to deviate? Yes, lower price. How will firm 2 respond? Match price.
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 2/2/11 Coordinated Behavior To collude firms must solve two interrelated problems: 1. They must reach an agreement on price or output. 2. They must also be able to enforce the agreement given that there will be an incentive to cheat. Enforcement requires the ability to detect and punish firms that deviate.
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 2/2/11 Coordinated Behavior Firms may have difficulty reaching an agreement on the cooperative price and market shares. Disagreements regarding the division of the spoils make reaching an agreement problematic.
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 2/2/11 Coordinated Behavior Firms may have difficulty enforcing the agreement they may be unable to stop cheating. Firms may attempt to engage in secret price cuts.
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 2/2/11 Coordinated Behavior Firms may have difficulty establishing the necessary communication to reach, manage, and monitor an agreement. Because collusion is illegal, elaborate protocols need to be developed to keep communications private and out of the hearing range of the antitrust authorities.
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 2/2/11 Case Study: Airline Tariff Publishing Company (ATP) In late 1992, the DOJ filed an antitrust suit in order to prevent and restrain violations of Section 1 of the Sherman Act by eight major air carriers in the United States. Section 1 of Sherman Act “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign
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 2/2/11 Case Study: Airline Tariff Publishing Company (ATP) The eight defendant airlines were Alaska, American, Continental, Delta, Northwest, TWA, United, and USAir. At issue were the activities of the Airline Tariff Publishing Co. (ATP). ATP was a joint venture of the air
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Lecture16_Collusion_Econ121_Fall2010 (2) - Lecture 16...

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