Tacit versus Overt Collusion Firm Asymmetries and Numbers: What's the Evidence?

Abstract

It is conventional wisdom that collusion is more likely the fewer firms there are in a market and the more symmetric they are. This is often theoretically justified in terms of a repeated non-cooperative game. Although that model fits more easily with tacit than overt collusion, the impression sometimes given is that 'one model fits all'. Moreover, the empirical literature offers few stylised facts on the most simple of questions -how few are few and how symmetric is symmetric? This paper attempts to fill this gap while also exploring the interface of tacit and overt collusion, albeit in an indirect way. First, it identifies the empirical model of tacit collusion that the European Commission appears to have employed in coordinated effects merger casesapparently only fairly symmetric duopolies fit the bill. Second, it shows that, intriguingly, the same story emerges from the quite different experimental literature on tacit collusion. This offers a stark contrast with the findings for a sample of prosecuted cartels; on average, these involve six members (often more) and size asymmetries among members are often considerable. The indirect nature of this 'evidence' cautions against definitive conclusions; nevertheless, the contrast offers little comfort for those who believe that the same model does, more or less, fit all.

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

“…The empirical cartel literature has paid relatively little attention to the extent of size asymmetries observed within detected cartels. However, from our own work on a sample of 41 prosecuted EC cartels (Davies and Olczak, 2008) it is clear that many real world cartels display far greater size asymmetries amongst cartel members than is found in our present merger sample: only five of these cartels lie within the region of collective dominance shown in figure 5; 11 others lie within the SD region and the remaining 25 fall in the NI region.…”

“…Here, typically, far more than just two firms are involved. A variety of survey studies suggest that the median number of firms in prosecuted cartels lies between 5 and 8 (Davies and Olczak, 2008). The empirical cartel literature has paid relatively little attention to the extent of size asymmetries observed within detected cartels.…”

Tacit collusion with price-matching punishments

“…Finally, our findings may also help reconcile the apparent dichotomy between the approach taken by competition authorities in coordinatedeffects merger cases, in which only mergers that lead to symmetric industry structures will tend to be disallowed on the grounds of facilitating tacit collusion, and the fact that prosecuted cartels (in which collusion is overt) often involve asymmetric firms (see Davies and Olczak, 2008). In the former case (i.e.…”

Unilateral Effects Analysis in Differentiated Product Markets: Guidelines, Policy, and Change

“…This research parallels studies that explore how the internal merger review process addresses ease of collusion in both the United States (Coate 2008) and European Union (Davies and Olczak 2008).…”