L14: Collusion

Question 1

explicit collusion

Answer 1

explicitly collude and agree on a price

Question 2

tacit collusion

Answer 2

without speaking, increasingly enter a collusive agreement

Question 3

why is the static cournot model incomplete?

Answer 3

tells us that collusion doesn’t exist because no one has incentive to agree since you are better off deviating

Question 4

why do dynamics help sustain collusion?

Answer 4

threat of losing future collusive profits upon deviation preserves cooperation

large future gains make up for short-term gain

Question 5

key to stability and collusion in a dynamic game

Answer 5

firms have to be sufficiently patient

activity must be monitored, at least partially

Question 6

role of patience

Answer 6

key component of equilibrium depends on the discount period

if you’re patient, you value stability forever but if you’re impatient, you screw up future payoffs

Question 7

what happens if the game has a finite horizon of T periods?

Answer 7

in the final period, firms will deviate
- this also happens in the second to last period

for every beta, deviation occurs

cooperation unravels and becomes unsustainable
- only sustained on games which go to infinity

Question 8

difficulties for sustaining collusion: entry of new rivals

Answer 8

collusion easier when number of firms is lower

existence of rival firms erodes cartel profits

if entry > demand growth, future payoffs decrease

lower future payoffs harm stability of the collusive agreement

Question 9

difficulties for sustaining collusion: the role of the business cycle

Answer 9

if demand is growing before a boom, easy to sustain collusion
- short term cooperation payoff increases due to the boom

but if demand is falling, hard to sustain collusion
- future profits are lower so deviating is the best thing to do to capture all profits

Question 10

difficulties for sustaining collusion: imperfect monitoring

Answer 10

if you can’t observe what the other firm is doing, hard to punish them

in some markets, firms negotiate prices with consumers so hard to observe prices and harder to sustain collusion

Question 11

japanese procurement auctions (Kuwai and Nakabyash, 2020)

Answer 11

government contracts based on first price auctions
- firm with lowest offer (cost) gets the contract
- secret reserve price where the bid has to be lower than the price to win

consistency where whoever wins the first round also wins the second round
- inconsistent with competition, suggests that they are colluding
- somehow the three bidders are agreeing on who wins which auctions and split it up