Explicit vs tacit collusion: The effects of firm numbers and asymmetries

Abstract

Highlights• We analyse firms' incentives to form a cartel when they can also collude tacitly • A cartel improves monitoring over tacit collusion but runs the risk of sanctions• We find cartels are less likely to arise in markets with a few symmetric firms • This contrasts with the conventional wisdom but is consistent with some evidence• It also raises questions over the use of structural indicators to screen for cartels AbstractIn an infinitely repeated game where firms with (possibly asymmetric) capacity constraints can make secret price cuts, we analyse the incentives for explicit collusion when firms can alternatively collude tacitly. Tacit collusion can involve price wars on the equilibrium path. Explicit collusion involves firms secretly sharing their private information to avoid such price wars, but this is illegal and runs the risk of sanctions. We find that, in contrast to the conventional wisdom but consistent with some empirical evidence, illegal cartels are least likely to arise in markets with a few symmetric firms, because tacit collusion is relatively more appealing in such markets. We discuss the implications for anti-cartel enforcement policy.JEL classification: D43, D82, K21, L44

Number Effects and Tacit Collusion in Experimental Oligopolies

“…As pointed out by Davies and Olczak [2008], the theoretical and experimental findings that collusion is more likely with a low number of firms is at odds with the empirical observation that most prosecuted cartels involve five or more members. Following Garrod and Olczak [2018] this may be explained by a substitutive relationship between explicit and tacit collusion agreements: with a lower number of firms, tacit collusion is most successful, whereas with a higher number of firms, explicit collusion is. Our experimental results support this explanatory approach: First, tacit collusion becomes less sustainable with a higher number of firms.…”

Collusion sustainability with a capacity-constrained firm

“…Capacity constraints and collusion. An active body of literature has sought to study collusion and capacity constraints Harrington, 2010, 2015;Compte et al, 2002;De Roos, 2004;Fabra, 2006;Garrod and Olczak, 2018). A common result in this literature is that small firms have fewer incentives to join a conspiracy than large firms.…”

Two‐stage market clearing approach to mitigate generator collusion in Eastern China electricity market via system dynamics method

“…There are two types of collusion, explicit collusion and tacit collusion, in a competitive market. The explicit collusion is often accompanied with direct communication among firms and the tacit collusion is not [4]. Both types of collusion enable the collusive market players to exercise their market power and reduce market efficiency [5].…”