ch15 - Collusion in Practice Chapter 15: Collusion in...

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Chapter 15: Collusion in Practice 1 Collusion in Practice
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Chapter 15: Collusion in Practice 2 Introduction Collusion is difficult to detect no detailed information on costs can only infer behavior Where is collusion most likely? look at the cartel member’s central problem cooperation is necessary to sustain the cartel but on what should the firms cooperate? take an example duopolists with different costs
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Chapter 15: Collusion in Practice 3 An Example of Collusion Suppose there are two firms with different costs Profit-possibility frontier describes maximum non- cooperative joint profit Point M is maximum joint profit π 1m to firm 1 2m to firm 2 π m in total π 1 π 2 M π 1m π 2m π m π m This is the profit- possibility curve This is maximum aggregate profit
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Chapter 15: Collusion in Practice 4 Example of Collusion 2 Suppose that the Cournot equilibrium is at C π 1 π 2 M π 1m π 2m π m π m C Collusion at M is not feasible firm 2 makes less than at C A side-payment from 1 to 2 makes collusion feasible on DE D E With no side-payment collusion is confined to AB A B
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Chapter 15: Collusion in Practice 5 Market Features the Aid Collusion Potential for monopoly profit demand relatively inelastic ability to restrict entry common marketing agency persuade consumers of advantages of buying from agency members » low search costs » security trade association control access to the market » persuade consumers that buying from non-members is risky » use marketing power
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Chapter 15: Collusion in Practice 6 Features Aiding Collusion 2 Low costs of reaching a cooperative agreement small number of firms in the market lowers search, negotiation and monitoring costs makes trigger strategies easier and speedier to implement similar production costs avoids problems of side payments detailed negotiation misrepresentation of true costs lack of significant product differentiation again simplifies negotiation – don’t need to agree prices, quotas for every part of the product spectrum
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Chapter 15: Collusion in Practice 7 Features Aiding Collusion 3 Low cost of maintaining the agreement use mechanisms to lower cost of detecting cheating basing-point pricing use mechanisms to lower cost of detecting cheating most-favored customer clauses guarantees rebates if new customers are offered lower prices meet-the-competition clauses guarantee to meet any lower price removes temptation to cheat look at a simple example
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Chapter 15: Collusion in Practice 8 Meet-the-competition clause Firm 2 Firm 1 High Price Low Price High Price Low Price 12, 12
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This note was uploaded on 08/08/2011 for the course EC 170 taught by Professor Menegotto during the Fall '08 term at Tufts.

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ch15 - Collusion in Practice Chapter 15: Collusion in...

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