Tacit Collusion
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Phlips (1995)
- Explicit collusion aims at putting the members of an agreement at the point on the profit frontier at which their joint profit is maximised.
- Tacit collusion aims at increasing the profits of the colluders above the level implied by a non-cooperative Cournot-Nash equilibrium until, hopefully, the joint profit maximising point is reached.
- Objectives basically the same
- More complicated with tacit collusion due to absence of agreement in the form of a legally enforceable contract
- Typically because such contracts are illegal.
- Need to reach consensus
- As with formal cartel must be able to:
- Detect; and
- Punish cheating.
- Also need to avoid unnecessary price wars
'In an oligopolistic situation, with its precarious internal equilibrium, there is much to be gained from simply and widely understood rules of thumb, which minimize the danger of behaviour intended to be peaceful and co-operative being misunderstood as predatory or retaliatory.'
Modigliani, F., (1958): New Developments on the Oligopoly Front, Journal of Political Economy, 66 (June): 215-32.
Definition of concerted practice.
'….a form of co-ordination between undertakings which, without having reached the stage where an agreement properly so called has been concluded, knowingly substitutes practical co-operation between them for the risks of competition.'
Case 48/69 ICI v. Commission ('dyestuffs') [1972] ECR 619.
How Much Cooperation is Required?
In Suiker Unie ECJ held that concept of concerted practice did not require the working out of an actual plan and that:
'…each economic operator must determine independently the policy which he intends to adopt on the common market including the choice of the persons and undertakings to which he makes offers or sells…[T]his requirement …does,…, strictly preclude any direct or indirect contact between such operators…to influence the conduct on the market of an actual or potential competitor or to disclose to such competitor the course of conduct which they themselves have decided to adopt or contemplate adopting on the market.' Case 47/73, Suiker Unie v. Commission [1975] ECR 1663.
Parallel Behaviour Not Enough
Commission relied on parallel price changes over a period of several years.
- Wood Pulp.
Court held it had failed to prove collusion. Parallel behaviour not enough if there is an alternative explanation of such behaviour. See Phlips (1995) on this case. Such collusion impossible to prove.
Slade (1987): Interfirm Rivalry in a Repeated Game: An Empirical Test of Tacit Collusion, Journal of Industrial Economics, 35: 499-516 and reproduced in Phlips ed. Applied Industrial Economics.
- Advanced announcements of price changes
- Most Favoured Customer Clauses
- Meeting Competition Clauses
729 F.2d 128 (2nd Cir. 1984) (Ethyl). FTC v Du Pont – the Ethyl Case.
- E.I. du Pont de Nemours & Co. v. FTC,
Du Pont advance announcement of price rises. Court rejected collusion if alternative explanation for such behaviour. Record showed that Du Pont had pre-announced price increases even when it had a monopoly.
906 F.2d 432 (1990).
- Re Coordinated Pretrial Proceedings in Petroleum Products Antitrust Litigation,
Oil companies disseminated information regarding their wholesale and retail prices for the purposes of quickly informing competitors of a price change in the hope that they would follow suit Court found some of the information circulated was only of interest to the companies and their franchisees and that there was no legitimate business reason for circulating the information to individual retailers.
- MMC (1986): White Salt: A Report on the Supply of White Salt in the United Kingdom by Producers of Such Salt, London: HMSO
- Firms acted 'to restrain competition'.
- Evidence of price communications.
Rees (1993): Collusive Equilibrium in the Great Salt Duopoly, Economic Journal , 103: 833-48, reproduced in Phlips ed. Applied Industrial Economics
- Rejects arguments that parallel price changes result of competition.
- In 'homogenous price-setting duopoly with exogenous capacity constraints, non-cooperative behaviour does not result in identical prices.'
- Borenstein (1999): Rapid Price Communication and Coordination: The Airline Tariff Publishing Case, in White and Kwoka.
- Talking without meeting.
- Phlips (1995, p.82) criticises competition authorities for assuming information exchanges is proof of collusion.
- Difficulties of enforcing collusion, simple exchange of information cannot be construed as implying a collusive outcome is being achieved.
- All it could show is collusive conduct, 'in the sense that the oligopolists are trying to achieve a collusive outcome.' (Emphasis in original).
- Firm indicates that if it charges a lower price to any customer over some future period it will refund previous buyers.
- General Electric 'price protection plan'
- Appears to make firm vulnerable to price cuts by rivals.
- What is the message?
- Ultimately found illegal
- If you can buy it cheaper somewhere else we will match price.
- Competition Authority decision in Statoil
- What was benefit to Statoil?
- Filling Stations
- Cannot compel firms to behave irrationally.
- But note UK complex monopoly provisions.
- Fingleton (2004) proposal for similar provisions in Irish legislation
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