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The Economics of Collusion

The Economics of Collusion: Cartels and Bidding Rings

Robert C. Marshall
Leslie M. Marx
Copyright Date: 2012
Published by: MIT Press
Pages: 320
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  • Book Info
    The Economics of Collusion
    Book Description:

    Explicit collusion is an agreement among competitors to suppress rivalry that relies on interfirm communication and/or transfers. Rivalry between competitors erodes profits; the suppression of rivalry through collusion is one avenue by which firms can enhance profits. Many cartels and bidding rings function for years in a stable and peaceful manner despite the illegality of their agreements and incentives for deviation by their members. In The Economics of Collusion, Robert Marshall and Leslie Marx offer an examination of collusive behavior: what it is, why it is profitable, how it is implemented, and how it might be detected. Marshall and Marx, who have studied collusion extensively for two decades, begin with three narratives: the organization and implementation of a cartel, the organization and implementation of a bidding ring, and a parent company's efforts to detect collusion by its divisions. These accounts--fictitious, but rooted in the inner workings and details from actual cases--offer a novel and engaging way for the reader to understand the basics of collusive behavior. The narratives are followed by detailed economic analyses of cartels, bidding rings, and detection. The narratives offer an engaging entrée to the more rigorous economic discussion that follows. The book is accessible to any reader who understands basic economic reasoning. Mathematical material is flagged with asterisks.

    eISBN: 978-0-262-30150-3
    Subjects: Economics

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. Preface
    (pp. ix-xii)
    Bob Marshall and Leslie Marx
  4. 1 Introduction
    (pp. 1-26)

    Figure 1.1 shows a plot of the price for vitamin A acetate 650 feed grade, which is a vitamin product used to supplement the feed of livestock.¹

    Perhaps the most noticeable feature of the price plot in figure 1.1 is the increase in the price from 1990 through 1994. There could be numerous explanations for the price of a product changing through time. What accounts for this dramatic increase?

    The primary manufacturers of vitamins pled guilty to participation in a worldwide price-fixing conspiracy for much of the 1990s. The conspiracy went far beyond vitamin A. It included vitamins A, B₁,...

  5. I Collusion in Practice

    • 2 Narrative of a Cartel
      (pp. 29-54)

      Consider an industry with four firms, where two of the firms are divisions of major multi-product parent corporations and the division managers are essentially independent and autonomous decision makers.¹ There is no real threat of entry because of the capital intensive nature of the industry in conjunction with the learning-by-doing nature of the production process. There are no reasonable substitute products for the commodity made by these firms. No suppliers have any degree of bargaining power against any of the firms, and the same is generally true for buyers, although there are some large European buyers. The commodity that the...

    • 3 Narrative of a Bidding Ring
      (pp. 55-70)

      This chapter deals with collusion at auctions by bidding rings. Bid rigging is a violation of the Sherman Act for both auctions and procurements. A large amount of bidding in the United States occurs at auctions, especially ascending-bid auctions.¹ For example, tobacco, timber, art, antiques, the assets of many bankrupt firms, and numerous other commodities are sold via ascending-bid auctions.²

      In this chapter, we provide a fictional account of a bidding ring operating at an ascending-bid auction. Footnotes indicate similarities between our story and known bidding cartels, including stamps,³ antiques,₄ machinery,₅ and real estate.₆

      In the previous chapter, we focused...

    • 4 Narrative of Cartel Detection
      (pp. 71-80)

      In this chapter, we discuss the process of inferring collusion from economic evidence. As the basis for the narrative in this chapter, we return to the four colluding firms introduced in chapter 2. We assume that those four firms actually formed the proposed cartel and that they have been successfully operating for three years. As in the narrative of chapter 2, our focus is on industrial cartels, where the colluding firms produce an intermediate good to be sold to other firms.

      We suppose further that one of the colluding firms is the division of a parent corporation and that the...

  6. II Economics of Cartels

    • 5 Suppression of Rivalry by Cartels
      (pp. 83-104)

      Rivalry among firms in an oligopolistic industry consists of any firm-specific investments or actions that enhance a firm’s product in the eyes of customers relative to products of other firms in the industry. Interfirm rivalry can occur in both price and nonprice terms. Any component of price can be a potential source for price-based rivalry, including payment terms, rebates, quantity discounts, shipping costs, and a myriad of other components of price. Nonprice rivalry can occur in advertising and marketing, research and development, product innovation and differentiation, and components of quality such as product reliability, product durability, customer service, and timeliness...

    • 6 Implementation of Collusion by Cartels
      (pp. 105-142)

      As described in the previous chapter, cartel firms can increase their profits relative to noncooperative behavior if they can orchestrate their actions so as to mitigate interfirm rivalry. Cartels put in place structures to coordinate behavior to secure a collusive gain and combat secret deviations by members. In this chapter, we explore Stigler’s (1964) description of the components of collusive structures and then discuss each in detail.

      Stigler (1964) is foundational to the economics of industrial organization, and especially the economics of explicit collusion. Stigler (1964) begins his analysis by noting that a cartel will want to increase profits through...

    • 7 Beyond the Suppression of Within-cartel Rivalry
      (pp. 143-160)

      In this chapter, we consider ways in which cartels can go beyond simply suppressing within-cartel rivalry. In a coarse sense, the four perimeter forces of Porter’s Five Forces are the focus of the cartel once it has successfully suppressed rivalry among members. However, Porter’s Five Forces diagram can be augmented to more clearly portray these incremental sources of profit for a cartel.

      As discussed in chapter 5, and as portrayed in figure 5.1, the suppression of rivalry by cartel firms also involves the management of buyer resistance to price increases and the management of seller resistance to downward pressure on...

  7. III Economics of Bidding Rings

    • 8 Suppression of Interbidder Rivalry by Rings
      (pp. 163-186)

      Before delving into the suppression of interbidder rivalry, we offer an introduction regarding the important role that competition plays with regard to information revelation and price discovery for market participants.

      Auctions and procurements are used throughout market-based economies and account for a large volume of economic transactions. In particular, the public sector is heavily reliant on auctions and procurements. The mere weight of transaction from auctions and procurements mandates an analysis of bidding rings.¹ In addition, to implement a pricefixing agreement, a cartel will, with rare exception, need to discuss and agree upon bids to be submitted at procurements, or...

    • 9 Implementation of Collusion by Rings
      (pp. 187-198)

      The previous chapter shows what a bidding ring potentially can achieve through the suppression of rivalry. In order to achieve those gains from collusion, a bidding ring must overcome certain hurdles.

      The Stiglerian collusive structures described in figure 6.1 apply to rings as well as cartels.

      Rings use pricing structures, allocation structures, and enforcement structures to increase their collusive profit and deter secret deviations. We identify and discuss some of the unique features of rings with specific cases including cast-iron pipe, wholesale stamps, antiques, used industrial machinery, and real estate.

      The examples we consider cover three key auction environments: a...

    • 10 Effects of Auction Design on Rings
      (pp. 199-210)

      As shown in chapter 8, the profitability of a bidding ring is affected by whether the auction format is ascending bid or sealed bid. As shown in chapter 9, the collusive structures required to support a bidding ring vary according to the auction format and other details such as whether bidder identities are observable during an ascending-bid auction. These results suggest that an auctioneer can potentially deter collusion by making certain choices about auction design.¹ In this chapter, we discuss how auction design affects the profitability of collusion or costliness of the collusive structures required to support collusion.²

      The robustness...

  8. IV Detection of Collusion Using Economic Evidence

    • 11 Plus Factors
      (pp. 213-240)

      Plus factors are the body of economic circumstantial evidence of collusion, above and beyond the parallel movement of prices by firms in an industry.¹ Plus factors are the economic criteria that can assist with the diagnosis of collusion.² When a plus factor delivers a strong inference of collusion, we refer to that plus factor as a super-plus factor.³

      We begin by reviewing the structures used by cartels and the observable conduct within these structures that can generate plus factors. In part I, we described nine broad baskets for the conduct of an explicit cartel (see chapter 4.3).⁴ We can now...

    • 12 Plus Factors for Rings
      (pp. 241-256)

      As described in chapter 11, the term “plus” in “plus factors ” refers to factors, above and beyond a parallel movement in prices, that lead to the inference of collusion. However, if an item being sold at an auction or purchased through a procurement is sufficiently unique in its characteristics, then the notion of a parallel movement in prices, akin to what we might observe among oligopolists who make similar products, is not meaningful. Thus, in some auction contexts, factors that would indicate explicit collusion are not truly “plus” factors. Nevertheless, we continue to use the terminology “plus factors,” but...

    • 13 Coordinated Effects in Horizontal Mergers
      (pp. 257-264)

      Whereas the two previous chapters deal with detection of existing collusion, this chapter concerns the anticipation of future collusion following a merger. Detection is about economic evidence that leads to the inference of collusion whereas anticipation is about the characteristics of the product/market/industry that lend themselves to collusion after two or more firms have combined.

      In some cases, when firms reach a decision to merge into a single corporate entity, they must notify federal authorities of their intent to do so and undergo scrutiny regarding the potential negative consequences of the merger for consumer surplus.¹ Sometimes the federal authorities will...

  9. References for EC Decisions
    (pp. 265-266)
  10. References
    (pp. 267-280)
  11. Index of Authors
    (pp. 281-284)
  12. Index of Subjects and Cases
    (pp. 285-302)