Industrial

Economics B
Concentration
Information
Multi-market
Take Aways
IEB Part I
Industrial Industrial
Economics B Outline Economics B
LECTURE 6
Dynamic oligopolistic competition 2
Collusion
Today: Factors that A↵ect Collusion Collusion
Lecture 6 1 Factors that a↵ect collusion
Dynamic Oligopolistic Competition 2
Rasyad A. Parinduri After attending this lecture, you will be able to:
rasyad.parinduri@nottingham.edu.my Analyze the possibility of collusion with more realistic
dynamic games.
University of Nottingham,
Malaysia Campus
Industrial Industrial
Economics B Market Concentration Economics B
Collusion is likelier in high-concentrated industries
Concentration Concentration
Industrial Industrial
Economics B Outline Economics B
Information
Multi-market Assume n firms, homogenous good, constant marginal costs:
Information
Multi-market
Take Aways Take Aways
Dynamic oligopolistic competition 2 Per period collusive payo↵ = pm
n
Collusion Collusion
As n increases, the temptation to undercut increases,
Today: because the per period gain pm is greater relative to
Part I pm
1 Factors that a↵ect collusion n .
If there are, for example, two firms, for collusion to hold:
Factors that A↵ect Collusion pm
2 (1 + d + d2 + ...) > pm
If there are ten firms, for collusion to hold:
After attending this lecture, you will be able to: pm
d + d2 + ...) > pm
10 (1 +
Analyze the possibility of collusion with more realistic In other words, as n increases, we require an even
dynamic games. higher discount factor to sustain collusion.
Collusion is easier to sustain with less firms (i.e. higher
market concentration).
Industrial Industrial
Economics B Market Concentration Economics B
 For example, if d =
market 2 in the mu
market case.
Industrial
Industrial
Price Wars during Booms Industrial
Economics B Take Aways
Information & Interaction Lags Economics B Multi-market Contact
Rotemberg and Saloner (1986) Economics B
Concentration
Dynamic Oligopolistic Competitio
Lags cause collusion less likely Single market may not support collusion Information
Concentration
Information
Assume stochastic demand: Concentration
Information
Multi-market Key terms:
Take Aways
What if there is interaction lags? Multi-market Suppose there are two identical markets: Multi-market
Collusion:
Industrial Suppose that the discounted stream of a of future high Industrial
Information & Interaction Lags
Price cuts should ideally be punished as soon as they
Take Aways
Economics B Multi-market
Assume further that two firms ”meets
and low
Contact
morewhich
profits, frequently”
Take Aways
depends on boom or bust, is V .
Economics B
- Collusion is likelier
Lags cause collusion less likely
happen. in market 1. Single market may not support collusion - Lags cause collusion
Concentration If a firm undercut at time t, then it gets pm in that Concentration
- Multiple markets m
Detection lagsif imply ...the two firms competingperiod
Information
in market
and 1zero
every period
forever and
after. Information
What theremore ‘periods’ of lags?
is interaction being suckered. Multi-market Suppose there are two identical markets: Multi-market - Collusion tends to b
Delaying punishment makes cheating attractive. in market 2 every even period.
Take Aways If it does not undercut, it gets p2m + dV Take Aways
Price cuts shouldd ideally Assume2 is dfurther
2 , which that
is lesstwo
thanfirms ”meets more frequently”
requiredbe punished as soon as they The discount factor in market Next lecture:
With less frequent interaction, increases. So, for collusion, we must have:
happen. the minimum d for collusion to be sustained in market 2.
in market 1.
For example, assume detection only after 2 periods. dV > p2m for both high and low demand. Lecture 7: Antitrust L
Suppose d2 < 21 < d, then:...the two firms competing in market 1 every period and
If there are Detection lags
two firms, for implytomore
collusion hold:‘periods’ of being suckered. Because profits when demand is high are larger,
Single market case: Collusion
in marketis Hunsustainable
2 every even in market
period.
pm
2 (1 + d2 + ...) >punishment
d +Delaying pm (1 + d) makes cheating attractive. 2. dV > p2m implies:
The discount factor in market 2 is d 2 , which is less than
> 0.7less frequent interaction, d required increases.
That is, if dWith Multi-market case: Collusion is sustainable
- When demand if:
is high, the temptation to undercut is
pm 2 3
2 ( d + d + d + ...) +
p
d2 + d4cartels
the2m (minimum
higher; + d6d+for > pm
...) collusion
tend to2break
2 . down
to be
whensustained
the marketinismarket 2.
Lags cause collusion less likely.
For example, assume detection only after 2 periods. That is if d = 0.59. booming. 2 < 1 < d, then:
For example, if d = 0.6,Suppose
collusion isd sustainable
2 for
If there are two firms, for collusion to hold: market 2 in the multi-market Single
case butmarket
not in the single
case: Collusion is unsustainable in market
pm
2 (1 + d + d2 + ...) > pm (1 + d) market case.
2.
That is, if d > 0.7 Multi-market case: Collusion is sustainable if:
pm 2 3 d2 + dB4 + d6 + ...) > 2 p2m .
pm Industrial
Industrial
Price Wars during Booms
Lags cause collusion less likely.
Economics B Take Aways 2 ( d + d + d + ...) + 2 (Economics
Rotemberg and Saloner (1986) Dynamic Oligopolistic Competition 2 That is if d = 0.59.
Concentration Concentration
Information For example, if d = 0.6, collusion
Information is sustainable for
Assume stochastic demand: Multi-market Key terms: market 2 in the multi-market
Multi-market
case but not in the single
Take Aways Take Aways
Suppose that the discounted stream of a of future high Collusion: market case.
and low profits, which depends on boom or bust, is V . - Collusion is likelier in high-concentrated industries
Industrial Industrial - Lags cause collusion less likely
Economics B Multi-market Contactat time t, then it gets pm in that
If a firm undercut Economics B Industrial Industrial
period
Single market Price Wars during Booms
mayand
not zero forever
support after.
collusion
- Multiple
Economics B Take Aways
markets make collusion more likely
- Collusion tends to break down when market’s booming.
Economics B
Concentration Concentration
Rotemberg and Saloner (1986)
pm Dynamic Oligopolistic Competition 2
If itthere
doesarenot undercut,
identical itmarkets:
gets 2 + dV
Information Information
Multi-market Suppose two Multi-market
Concentration Concentration
Take Aways
So, forfurther
collusion, we Take Aways Next lecture:
Information Information
Assume Assume that twomust
stochasticfirmshave:
demand:
”meets more frequently” Multi-market Key terms: Multi-market
indV > p2m1. for both high and low demand.
market Lecture
Take Aways 7: Antitrust Laws and Policies Take Aways
...the two firms
Because Suppose
profitscompeting that
when demand theis discounted
in market 1 every
high are periodstream
larger, and of a of future high Collusion:
andeven
in market H2 every low period.
profits, which depends on boom or bust, is V . - Collusion is likelier in high-concentrated industries
dV > p2m implies:
The discount factor in market 2 is 2 , which - Lags cause collusion less likely
If
- When demand a firm undercut
is high,
d at
the temptation timetoist,
less than
then
undercut it
is gets pm in that
the minimum for collusion
dcartels to be sustained in the
market 2. is - Multiple markets make collusion more likely
higher; period tend
andtozero
break down when
forever after. market
Suppose d2 < 1 < d, then:
booming.2 - Collusion tends to break down when market’s booming.
pm
If itcase:
Single market doesCollusion
not undercut, it gets
is unsustainable 2 + dV
in market
2. So, for collusion, we must have: Next lecture:
Multi-market case: Collusion is sustainable if:
pm
2 ( d + d dV > pm) +for
2 + d3 + ...
2
pm 2
d + d4high
2 (both + d6 + ...) >
and low2 p2mdemand.
. Lecture 7: Antitrust Laws and Policies
That is if d = 0.59.
Because
For example, profits
if d = 0.6, when
collusion demand
is sustainable for is high are larger,
market 2 in the multi-market
H case but not in the single
dV > p2m implies:
market case.
- When demand is high, the temptation to undercut is
Industrial
Economics B Take Aways higher; cartels tend to break down when the market is
Industrial
Economics B
booming.
Dynamic Oligopolistic Competition 2
Concentration Concentration
Information Information
Multi-market Key terms: Multi-market
Take Aways Take Aways
Collusion:
- Collusion is likelier in high-concentrated industries
- Lags cause collusion less likely
- Multiple markets make collusion more likely
- Collusion tends to break down when market’s booming.