Tacit collusion, firm asymmetries and numbers: Evidence from EC merger cases

Abstract

This paper estimates the implicit model, especially the roles of size asymmetries and firm numbers, used by the European Commission to identify mergers with coordinated effects. This subset of cases offers an opportunity to shed empirical light on the conditions where a Competition Authority believes tacit collusion is most likely to arise. We find that, for the Commission, tacit collusion is a rare phenomenon, largely confined to markets of two, more or less symmetric, players. This is consistent with recent experimental literature, but contrasts with the facts on 'hard-core' collusion in which firm numbers and asymmetries are often much larger. JEL Classification codes: L13, L41

Institutional Authority and Collusion

“…There is a 'collusion puzzle' to explain the difference between the robust lab finding that having more than two firms competing in a market drastically reduces the ability to collude whereas in the real world collusion can be observed with a larger number of firms as well (Davies et al, 2011;Davies and Olczak, 2008). The experiment presented in this paper is one piece of a jigsaw puzzle to explain these contrasting findings.…”

“…A 'collusion puzzle' exists between, on the one hand, the fact that increasing the number of firms should reduce the ability to tacitly collude, and leads to a collapse in collusion in experimental markets with three or more firms; and, on the other hand, the fact that in natural oligopolistic markets there are cases of larger number of firms tacitly colluding (Davies et al, 2011;Sen, 2003). We present an experiment showing that, if managers are deferential towards an authority, firms can induce more collusion by delegating production decisions to middle managers and providing suitable informal nudges.…”

“…However, it is still unclear why the experimental literature finds that collusion breaks down with three or more firms in the market, while in the real world larger numbers of firms seem to be able to tacitly collude (Davies et al, 2011;Sen 2003). Although many dimensions affect the likelihood of a collusive market outcome (for a review see Potters and Suetens, 2013), a 'collusion puzzle' remains regarding what dimensions potentially facilitate the ability to collude in settings with larger numbers of firms.…”

Assessing the Efficacy of Structural Merger Remedies: Choosing Between Theories of Harm?

“…Davies et al (2010) argue that the EC interprets this checklist as a series of necessary conditions which must be satisfied if it is to intervene. This is confirmed by a detailed reading of the EC's decision documents which reveal no cases where intervention occurs in spite of one or more checklist factors not being satisfied.…”

“…We also conduct an analogous comparison for a set of markets in which the merger was cleared without remedy: in that case, comparing the post-merger structure with what it would have been had remedies restored structure to its premerger status quo. In order to evaluate these comparisons, we employ a previously estimated model (Davies et al, 2010) which was used to explain the Commission's initial merger decisions on whether or not to intervene, and, if so, under which theory of harm.…”