A theory of collusion with partial mutual understanding

Abstract

Unlawful collusion is when …rms have a mutual understanding to coordinate their behavior for the purpose of achieving a supracompetitive outcome. Given the legal focus on mutual beliefs, this paper explores the role of mutual beliefs in producing collusion. Focusing on price leadership, …rms are assumed to commonly believe that price increases will be at least matched but lack any shared understanding about who will lead, when they will, and at what prices. Su¢cient conditions are derived which ensure that supracompetitive prices emerge. However, price is bounded below the maximal equilibrium price. I am grateful for the comments of Emiliano Catonini,

Corporate Disclosure as a Tacit Coordination Mechanism: Evidence from Cartel Enforcement Regulations

“…Given that taking the lead is costly-as a firm raises its price before others do and thus loses market share-each firm would like another firm to take the lead, and this could generate mis-coordination. Although the presence of mutual beliefs that price increases will be matched could eventually lead to collusive prices, such prices might not result because of the lack of shared understanding about who will lead, when they will lead, and at what prices (Harrington [2017]). Pastine and Pastine [2004] argue that "leader-follower pattern where a single firm consistently leads all price changes is unlikely."…”

“…Moreover, Block, Nold, and Sidak [1981] argue that when it is harder to collude explicitly on prices, firms switch to the forms of collusion that are harder for antitrust authorities to catch, for example, to partial collusion. Also, Harrington [2017] shows that even when it is common knowledge that price increases will be matched, tacit coordination might not lead to the collusive prices if the mutual beliefs of all firm strategies are not shared (while such mutual beliefs can converge fast with direct communication). Finally, these arguments are also in line with the seminal email game (Rubinstein [1989]), in which under common knowledge the players can achieve efficient coordination (i.e., direct private communication in our context), but “almost” common knowledge can lead to inefficient outcomes (i.e., public communication that might be misinterpreted).…”

State-aided Price Coordination in the Dutch Mortgage Market

“…A subgroup of the …rms active in a market may be sustainable as a partial cartel that price leads a competitive fringe that bene…ts from the umbrella e¤ect, as in d'Aspremont et al (1983). 26 Harrington (2017) shows how coordination on collusive price leadership roles requires little communication.…”

“…InPastine and Pastine (2004) there are costs of delay and the …rm with the shorter reaction time or the lowest cost of delay emerges as the leader Amir and Stepanova (2006). demonstrate in a Bertrand duopoly with asymmetric costs that the low-cost …rm has an advantage in leading 26. Collusive price leadership may also facilitate monitoring.…”

Measuring the effectiveness of anti‐cartel interventions in the shadow of recidivism1

“…Second, in many instances, cartelists may respond to prosecution in ways that maintain collusive activity in an industry at a high level but is not captured by empirical work that draws on evidence from prosecuted cartels. Thus, as stressed by Levenstein et al (2015), Harrington (2004Harrington ( , 2012, and Chowdhury and Crede (2020) 9 one obvious possibility is that having explicitly colluded in the past, firms will tacitly collude in the future. Having established norms, customer relationships, mechanisms for making prices transparent, etc., cartel members may find it much easier to engage in tacit collusion without explicit communication (having potentially) the same negative impact on consumers but escape legal scrutiny.…”