Economics
Tacit Collusion
Tacit collusion refers to a situation where firms in an industry coordinate their actions without explicit communication or agreement. This can occur through firms observing each other's behavior and responding in a way that maintains high prices and profits. It is difficult to detect and prove tacit collusion, but it can still harm competition and consumers.
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8 Key excerpts on "Tacit Collusion"
- Michal S. Gal, Michal S. GAL(Authors)
- 2009(Publication Date)
- Harvard University Press(Publisher)
Such practices make it possible for oligopolists to coordinate their conduct sufficiently well to achieve noncompetitive outcomes. 156 • Competition Policy for Small Market Economies Express or Tacit Collusive Agreements Collusion is the joint determination of output, prices, or other terms of trade by ostensibly independent firms to elevate their profits. The colluding firms agree on trade terms in light of the costs and returns from tailoring such terms to the diversity of transactions, the elasticity of demand, and the conditions of entry. 3 Collusion may take numer-ous forms, including price fixing, bid rigging, geographic or product market allocation, and customer allocation. Collusion can be express or tacit. Tacit Collusion is collusion that is communicated by informal or nonverbal means, without any di-rect, explicit communication between the parties. “Tacit” therefore describes the process by which the agreement was achieved. Tacit agreements are less likely to produce detailed arrangements cover-ing many variables and are thus less effectual than express collusion. Nonetheless, in highly concentrated markets with relatively homoge-neous products, firms may not need more that a tacit agreement to achieve collusive outcomes. Collusion is driven by the opportunity for firms in oligopolistic markets to elevate profits above the competitive level. The vitamin cartel of the 1990s serves as an example of a successful international cartel. The largest worldwide vitamin producers colluded to rig bids and divide up worldwide markets for vitamins. Overall, it is believed that the cartel boosted the price of products sold worldwide by more than $20 billion. Several jurisdictions, including the United States, Canada, Australia, and the EC, have successfully brought charges against the cartel members. 4 Restrictive agreements might also result from the incentives of firms in vertical or adjacent markets to increase their profits.
eBook - PDFVirtual Competition
The Promise and Perils of the Algorithm-Driven Economy
- Ariel Ezrachi, Maurice E. Stucke(Authors)
- 2016(Publication Date)
- Harvard University Press(Publisher)
The computer may also be programmed to identify maverick firms and punish any deviations from a possible Tacit Collusion. Competition law, in most jurisdictions, will require proof of an agree-ment among the parties to change the market dynamics. Can the competi-tion agency impute the presence of an illicit agreement or understanding 66 The Collusion Scenarios among the competitors to use similar algorithms to dampen competition? 31 Not necessarily. One should acknowledge that evolution dictates that the stronger, more powerful algorithms will likely prevail and dominate the technology market. This reality naturally fosters assimilation of systems between various computer developers and companies. Abstaining from an advanced algorithm may be irrational; it would be as if an investment bank or hedge fund insisted on human floor traders, when most trading is automated. In our example, there is no evidence of an agreement among the firms, but there is strong evidence of anticompetitive intent. Humans unilaterally design algorithms to deliver predictable outcomes and react in a given way to changing market conditions. The firms recognize, in this scenario, that the industry-wide adoption of similar algorithms would likely foster Tacit Collusion, whereby they mutually profit from their initial investment. Cru-cially, the use of advanced algorithms in this scenario transforms the “normal,” preexisting market conditions. Before algorithms, transparency was limited; conscious parallelism could not be sustained. To facilitate the use of the pricing algorithms, the firms increase transparency, which in turn makes Tacit Collusion likelier. While the mutual price monitoring at the heart of Tacit Collusion is legal under competition law, one may ask whether the creation of such a dynamic through “artificial” means should give rise to antitrust intervention. The main enforcement challenge concerns the legality of conscious paral-lelism.
eBook - PDF- Stewart R Clegg, Cynthia Hardy, Tom Lawrence, Walter R Nord, Stewart R Clegg, Cynthia Hardy, Tom Lawrence, Walter R Nord(Authors)
- 2006(Publication Date)
- SAGE Publications Ltd(Publisher)
Of course, much of this problem with cheating on collusive arrangements could be resolved if man-agers in colluding firms could sit down together, face-to-face, and work out their problems. However, such direct, face-to-face negotiations about the level of output in an industry and prices is, in most devel-oped economies, illegal. Such explicit collusion can lead to very real negative consequences for man-agers and firms, including large fines and time in prison. Most governments actively discourage explicit collusion because the lower levels of pro-duction and the higher prices it creates, while they may improve the profits of colluding firms, are gen-erally very bad for consumers, and for society as a whole (Scherer 1980). Indeed, as was suggested ear-lier, the effort to eliminate collusion was one of the primary policy objectives of the SCP framework. Given the risks associated with explicit collusion, firms seeking to engage in this form of co-operation must use, instead, Tacit Collusion. In Tacit Collusion, there again is an agreement to reduce output below, and prices above, the competitive level. However, these agreements are not directly negotiated. Rather, firms seeking to implement Tacit Collusion must interpret the intent of other firms to collude through the behaviours and signals these other firms send out (Spence 1974). Such interpretation of intentions to collude can be difficult. For exam-ple, suppose a firm that has been able to reduce its economic costs does not pass these lower costs along to customers in the form of lower prices. Does this mean that this firm is interested in developing some collusive relationships, or does it mean that this firm believes that demand for its highly differentiated product is sufficient to increase sales without price reductions? One tactic suggested for sustaining Tacit Collusion is to punish those that either raise their output level or reduce their prices.
eBook - PDFIndustrial Organization
Markets and Strategies
- Paul Belleflamme, Martin Peitz(Authors)
- 2015(Publication Date)
- Cambridge University Press(Publisher)
We then extend the basic setting in two directions: we first ask how punishments should optimally be designed to promote collusion and second how 358 Cartels and Tacit Collusion multimarket contact can make collusion easier to sustain (Subsections 14.2.2 and 14.2.3 ). We close this section with two more advanced topics, analysing how demand fluctuations and the unobservability of firms’ actions impact the sustainability of Tacit Collusion (Subsections 14.2.4 and 14.2.5 ). 14.2.1 Tacit Collusion: the basics Consider a number of firms (say two, for simplicity) that offer perfect substitutes produced at constant marginal costs c . Suppose that instead of competing just once, the two firms repeatedly compete over time. That is, at each period t = 1 , 2 , . . . , T , the firms repeat the ‘static’ game we analysed in Chapter 3 by simultaneously choosing the price, or the quantity, of their product. They observe the rival’s action after each period. A strategy is then a list of actions (a contingent plan) that tells the firm what to choose in each period as a function of past prices or quantities (that is, the history of the game). Strategies can take complicated forms; in particular, the action prescribed at some period may depend on the observed actions (of all players) at all previous periods. Future periods are discounted by the factor δ and thus present discounted profits are ∑ T t = 0 δ t π t i ( σ t 1 , σ t 2 ), where π t i is firm i ’s profit in period t , σ t i is firm i ’s action in that period (with σ i = p i or σ i = q i according to whether we consider price or quantity competition) and T is the last period (the ‘horizon’) of the repeated game. The question we want to investigate is whether firms can design strategies that allow them to reach a situation of Tacit Collusion, whereby they share the monopoly profit in each and every period. In what follows, we first show that whether the horizon is finite or infinite makes a crucial difference.
eBook - PDFCompetition Policy
Theory and Practice
- Massimo Motta(Author)
- 2004(Publication Date)
- Cambridge University Press(Publisher)
Neither ever competed with the other in their respective home markets in the Community. Similarly in overseas export markets each continued to respect the other's sphere of influence. (Soda- Ash: 27.) What is noticeable is that each firm admitted that it had no intention of invading the other's home market, but simply because it feared retaliation if it had done so (Soda-Ash: 43-44). They therefore justified a collusive outcome as the result of independent decisions that made sense from a business viewpoint. In this case, continuing to share markets was an easy way to reach Tacit Collusion. The other interesting point here is whether Tacit Collusion is an infringement of Article 81 (ex-85). In this case, the Commission decided that it was, and that the term "concerted practice" mentioned in Article 81 among the prohibited practices also covered Tacit Collusion: The Commission fully accepts that there is no direct evidence of an express agree- ment between Solvay and ICI to continue to respect the 'Page 1000' cartel in practice. However, there is no need for an express agreement in order for article 85 to apply. A tacit agreement would also fall under Community competition law. (Soda-Ash: 55.) 188 Collusion and Horizontal Agreements Note, however, that in some cases price parallelism can be credibly explained only by coordination among firms, even if there is no proof of the latter.
Available until 5 Dec |Learn moreEconomic Principles and Problems
A Pluralist Introduction
- Geoffrey Schneider(Author)
- 2021(Publication Date)
- Routledge(Publisher)
We see behavior similar to this in many industries, including beer, wireless carriers, potato chips, and soft drinks. Indeed, most oligopolies adopt similar pricing strategies when significant product differentiation does not exist.The kinked demand curve also shows us why it is almost irresistible for companies in oligopolies to collude. The demand curve when all firms change prices together is very inelastic—the firms are acting like a monopolist with no competition. If they all raise their prices together, then they will make a lot more total revenue. But such coordination is illegal in the United States and in most other countries, so collusion must be done tacitly or illegally most of the time.17.3 Tacit, illegal, and formal collusion
Collusion between firms can take a variety of forms. Because formal collusion is illegal in most countries, most collusion is tacit or illegal.Tacit Collusion that does not violate antitrust laws is difficult to achieve. Tacit Collusion occurs when firms find a way of agreeing on prices or production quotas without actually discussing such things. If they did engage in discussions to raise prices or reduce production, they could be prosecuted for price fixing or other actions that restrain competition and violate antitrust laws. In order to achieve stable pricing without legal violations, firms often turn to price leadership.Price leadership is a type of Tacit Collusion that occurs when one firm, the industry leader, sets the prices for the industry, and the other firms follow suit by adopting the same pricing structure. Though this is not technically illegal, firms who do this can still get sued for violating antitrust laws because they are acting as if they are colluding even if they are not doing so formally.We see price leadership in the airline industry repeatedly. For example, in 2008, American Airlines, the largest U.S. carrier, announced that they would start charging $15 for passengers’ checked bags. Almost immediately, Delta and AirTran announced that they, too, would charge exactly the same amount
eBook - PDF- Eleanor Fox, Daniel Sokol, Eleanor Fox, Daniel Sokol(Authors)
- 2009(Publication Date)
- Hart Publishing(Publisher)
f) When in public bids there is a pattern of conduct that indicates a pos-sible exchange of information relevant for the prices and quantity offered, or regarding the participation of the agents in the bidding process. g) When there is price dispersion for identical goods and the market shares are sta-ble for long periods of time in concentrated markets with high barriers to entry. To summarize, this list contains types of circumstantial evidence that may be used to prove Tacit Collusion. They include, among others, the following: a) parallel behavior (in prices and quantities); b) coordination managed or sponsored by trade associations or leading firms; 189 Claudia Curiel Léidenz, above n 186. Tacit Collusion in Latin America: A Comparative Study 239 c) exchange of information vital for competition; and d) price dispersion coupled with stable participation. 2. Decisions and Case Law Few Tacit Collusion cases have been decided by Panamanian tribunals and, thus far, all the cases have been resolved under Law 29 of 2006. Table 6 below lists the Tacit Collusion cases. There are several features that distinguish Panama’s competition laws and their enforcement from those of other Latam jurisdictions. First, the number of cases in Table 6 Tacit Collusion Cases in Panama Case Product Market Decision CLICAC v Gold Mills de Panamá Wheat flour Sanction. The second instance SA and others (2003) 190 tribunal 191 and the Supreme Court confirmed the first instance tribunal’s decision. 192 CLICAC v Aceti-Oxígeno SA Medical oxygen Sanction. The decision was and others (2004) 193 appealed before a Tribunal of Appeals 194 and the judgment is still pending. CLICAC v Continental Airlines Commercial airlines CLICAC decided to file a suit Inc and others (2001) 195 and the proceedings before the first instance tribunal are still ongoing.
eBook - PDF- David M. Kreps(Author)
- 2019(Publication Date)
- Princeton University Press(Publisher)
In many cases, the law is unclear, and management has a fiduciary respon-sibility to the holders of its equity. I am certainly uncomfortable with the position that management should push the law whenever and wherever it can. But I am also uncomfortable with the position that management should forebear from perfectly legal actions that would enhance the value of equity. 2. Effective antitrust and anticollusion enforcement begins with an under-standing of how collusion and, to look ahead to next chapter, predatory entry deterrence works. Legislators who draft the laws and regulatory au-thorities that administer them should understand how Tacit Collusion can be achieved and what structural impediments can be placed in its way. If 66 3. Reciprocity and Collusion you feel that you just read “How to Collude,” perhaps a more sympathetic reading would be “How Colluders Collude, and What You Can Do to Make It Difficult for Them.” 3. And, should you find yourself the customer of (what you suspect) is a col-lusive group of suppliers, knowing “how colluders collude, and what you can do to make it difficult for them” can be a very useful bit of knowledge. 3.3. Other Applications of the Folk Theorem Oligopolistic collusion is an important application of the basic idea of the folk theorem, but it is far from the only managerially relevant application. Whenever two (or more) parties enter in repeated transactions, the folk theorem can come into play as a primer on how to achieve win–win solutions. For instance, imagine two firms, one that bottles soft drinks and another that makes glass bottles. Because of the costs of transporting empty bottles, it makes sense for the bottle manufacturer and the bottler to locate facilities close to one another. Indeed, it makes sense for them to have adjoining plants, with a conveyor belt that moves empty bottles right onto the bottling line of the soft-drink bottler.
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