Lecture5_Cartels - INTRO CARTELS INDUSTRY FEATURES...

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Unformatted text preview: INTRO CARTELS INDUSTRY FEATURES ANTI-TRUST I NDUSTRIAL ORGANISATION (2011) T OPIC 5: C OLLUSION Nicolas de Roos 1 1 School of Economics University of Sydney INDUSTRIAL ORGANISATION (2011) TOPIC 5: COLLUSION INTRO CARTELS INDUSTRY FEATURES ANTI-TRUST O UTLINE INTRODUCTION THE CARTEL’S PROBLEM The cartel’s problem Repeated games Preventing cheating FACTORS FACILITATING COLLUSION Broad factors Specific factors ANTI-TRUST POLICY Australian anti-trust law Anti-trust law elsewhere Detecting cartels INDUSTRIAL ORGANISATION (2011) TOPIC 5: COLLUSION INTRO CARTELS INDUSTRY FEATURES ANTI-TRUST I NTRODUCTION Cartel • a group of firms that act collectively to raise their joint profits by restricting output or raising price Collusion • cooperation to improve joint payoffs • in oligopoly: acting collectively to raise joint profits (for example by raising prices) Tacit (or implicit) collusion • behaving cooperatively without communication Explicit collusion • communicating with your rivals to collude Why form a cartel? INDUSTRIAL ORGANISATION (2011) TOPIC 5: COLLUSION INTRO CARTELS INDUSTRY FEATURES ANTI-TRUST D ISCLAIMER Price-fixing cartels are illegal in Australia • they raise price and decrease output relative to a non-cooperative outcome • this leads to welfare losses We study cartels to understand how they behave • necessary for policy making INDUSTRIAL ORGANISATION (2011) TOPIC 5: COLLUSION INTRO CARTELS INDUSTRY FEATURES ANTI-TRUST O UTLINE INTRODUCTION THE CARTEL’S PROBLEM The cartel’s problem Repeated games Preventing cheating FACTORS FACILITATING COLLUSION Broad factors Specific factors ANTI-TRUST POLICY Australian anti-trust law Anti-trust law elsewhere Detecting cartels INDUSTRIAL ORGANISATION (2011) TOPIC 5: COLLUSION INTRO CARTELS INDUSTRY FEATURES ANTI-TRUST C ARTEL TRADE- OFFS There is a strong incentive to form a cartel • if firms cooperate they could earn almost monopoly profits • otherwise they face competitive/Bertrand/Cournot profits To see the downside, consider the Bertrand model • homogeneous products • firms set prices Suppose firms 1 and 2 agree to set the monopoly price p M • firm 1 has a strong incentive to set p 1 < p M • this gives firm 1 the entire market at close to p M • firm 2 should realise this and not trust firm 1 to set p M The logic is the same as the Prisoners’ Dilemma • both players would like to coordinate on p M • both players have a powerful to undercut INDUSTRIAL ORGANISATION (2011) TOPIC 5: COLLUSION INTRO CARTELS INDUSTRY FEATURES ANTI-TRUST S OLUTIONS TO THE PROBLEM How could the cartel solve the incentive problem • write a binding legal contract? • Illegal! • threaten to retaliate or punish if their rival undercuts • for this we need patient firms who interact repeatedly • how much communication is needed for this?...
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This note was uploaded on 10/28/2011 for the course ECOS 3005 taught by Professor Douglas during the Three '10 term at University of Sydney.

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Lecture5_Cartels - INTRO CARTELS INDUSTRY FEATURES...

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