Antitrust Economics of Regulation and Collusion

Economics of Regulation and
Antitrust
Collusion
Oligopoly
 A. Few Sellers / Recognized
Interdependence
 B. Cournot Model
• Firms choose quantity
• Assume that other firm does change output
• Example compared to PC and Monopoly
Oligopoly - Bertrand Model
• Firms choose price rather than output.
• With identical goods and constant MC, then
P=?
• If products are differentiated. - Example
Oligopoly - Chamberlin
(Monopolistic Competition)
• Criticized Bertrand and Cournot models
because they failed to recognize their
interdependence. He argued that intelligent
managers would know where the profitmaximizing price is and would be reluctant to
reduce price and leave all members of the
industry worse off.
Oligopoly - Stackelberg Model Price Leadership
– Designate one firm as a dominant firm and all the
other's in the industry follow this firm's cues. I.e.
one firm announce price changes and all the others
follow.
– Examples
– Automotive industry
– Banking Industry
Oligopoly - Stigler's Theory
 Incentive to collude is strong so as to
maximize joint profits but so is the
incentive to cheat. If any member can
secretly violate the agreement, he will gain
larger profits than by conforming to it.
Therefore enforcement, i.e. detecting
significant deviations from the agreedupon prices, is paramount
Stigler example
 Suppose 3 identical firms with zero costs ,
facing a market demand curve of Q=180-5P.
The monopoly price and quantity is $18 and
90 and the three firms agree to each supply
30. The $1620 industry profits are split
$540 to each.
Oligopoly
Oligopoly

d is the demand curve when everyone knows
(everyone makes 533.33), d' is when there are
secret cuts(if offered to all his customers then
$640, if only to "new" customers - $700), d'' is
secret cut that steals away other firms customers
without the other firm reacting - $800).

Conclusion - there is a great temptation to
secretly cut prices. Key is detection and
response.
Oligopoly - Game Theory
 Prisoner's Dilemma - Two suspected criminals
Butch and Sundance are arrested and put in
separate cells unable to communicate. If one
confesses while the other does not, the one who
confesses is granted immunity and goes free and
the other goes to jail for 20 years. If both confess
they both go to jail for 5 years. If both are silent,
both go to jail for only one year, for a lesser crime
(concealed weapons). The payoff matrix looks
like this:
Oligopoly
Sundance


Butch
Confesses
Remains Silent
Confesses
(-5,-5)
(0,-20)
Remains
Silent
(-20,0)
(-1,-1)
Whatever Butch does, Sundance is better off confessing.
Whatever Sundance does, Butch is better off confessing.
Both they are both better off if they both remain silent. How
can this be?
Oligopoly
 Duopolist's Dilemma
Firm A


Firm B
Cut Price ($12) Fix Price ($18)
Cut Price ($12) ($720,$720)
($1440,0)
Fix Price ($18) (0,$1440)
($810,$810)
Dominant Strategy is to cut price but both firms are better
off by fixing prices.
Can Collusion be beneficial?

It reduces uncertainty in profit rate , demand
uncertainty in the face of production
indivisibilities

Example
Can Collusion be beneficial?

Indivisibilities in production.

Other problems - large fixed and some avoidable
costs with uncertain demand.
Public Policy toward Oligopoly
and Collusion
 Section 1 of Sherman Act declares every
contract, combination, or conspiracy in
restraint of trade illegal. Price-fixing and
related practices were judged illegal per
se i.e. in and of themselves. There is to
asking of whether there were extenuating
circumstances no test of reasonableness
Cases
 Addyston Pipe and Steel
 Trenton Potteries
 Socony-Vacuum
 Interstate Circuit
 American Tobacco