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1 Cartels and Collusive Behaviour by Kevin Hinde.

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1 1 Cartels and Collusive Behaviour by Kevin Hinde

2 2 What is meant by collusion? Was Adam Smith right? – “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in conspiracy against the public, or in some contrivance to raise prices.” There is evidence that prices in oligopolistic markets stabilise but is this evidence of collusion between firms to agree prices or share out markets?

3 3 Tacit collusion Barometric Pricing Kinked Demand Curve Is price stability necessarily anti- competitive?

4 4 An example. Petrol Prices are stable but no cartel exists Source: 01.htmhttp://www.oft.gov.uk/news/press+releases/2001/pn+42a- 01.htm

5 5 The Cartel A cartel is an explicit agreement between firms to control price and / or market share. The cartel acts as a multi-plant monopolist restricting consumer choice and damaging economic welfare. There are many types of cartel. At one extreme is the centralised cartel. This is perfect collusion in that the cartel makes all the decisions for firms. An alternative is a market sharing cartel. Here firms carve up the monopoly output at the monopoly price. Remember Cartels are illegal in the UK, EC, USA, Japan, Thailand - Everywhere?

6 6 P 0 Q D S = MC MR Ppc Qpc Q cartel P cartel The centralised cartel

7 7 The Dynamics of Collusive Behaviour: The Prisoner’s Dilemma Game

8 RED BLUE C D DC (3, 3)(3, 3) (5, 0) (0, 5) (2, 2)

9 9 Bertrand Duopoly Game (100, 100) (140, -10) (-10, 140) (0, 0) Firm 2 High PriceLow Price Firm 1 High Price Low Price

10 10 Resolving the Prisoner’s Dilemma Game

11 11 Tit for Tat Strategies Discovered in Robert Axelrod’s tournament to be the most successful strategy. It entails – cooperation in the first round. – Every subsequent round adopt your opponents strategy (e.g. in round t adopt t-1) In the tournament each program competed – head to head against another – against another, but selected randomly by a computer – against itself.

12 12 Problems for Tit for Tat Generally tit for tat works because it is nice – it starts out co-operatively and is not the first to defect. Provocable – it will punish defection quickly forgiving – it will act co-operatively again if the other player co- operated in t-1 However it is suboptimal in – head to head contests with a dominant strategy player. – Situations where information is uncertain an incomplete

13 13 What factors facilitate (and thus limit the extent of) collusion? Clearly, it is possible to resolve the Prisoner’s Dilemma Game, although there are immense forces operating against it. Are there any clues as to when collusion may or may not occur? – Concentration and a small number of industry participants. – Costs – Demand – Rapid advances in Technology – Non-price competition

14 14 Horizontal Agreements But not all horizontal agreements are bad. Strategic Alliances to share R and D, for example, if registered, can be exempted from competition law. Both UK and EC law allows for this. Most collusive activity takes place between firms in the same sector. Recent UK examples: buses, car body parts. Even Public schools under investigation

15 15 Source: A Horizontal Cartel in Sorbate production

16 16 Collusion and Vertical Agreements Vertical restraints refer to the methods used by manufacturers to restrict the ways in which retailers can market their product. Examples include Franchising and Distribution channels. These usually provide for Resale Price Maintenance Agreements. There are benefits but also some costs. Notably minimum RPM and collusive activity. Two examples in the UK recently: Volvo and Football Kit Manufacturers.

17 17 Source:

18 18 A vertical cartel: Nintendo and it’s distributors Source: European CommissionEuropean Commission

19 19 Some on-line sites to help you learn. The Office of Fair Trading: The Competition Commission DGiv The European Competition Directorate Paper by the OECD (2002) – Try these self-assessment questions on Game TheoryGame Theory Have a look at this streaming media presentation on the Prisoner’s Dilemma GamePrisoner’s Dilemma Game

20 20 And Finally Summary Have you covered the learning outcomes? Any questions?


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