Definition and Scope of Collusive Practices People of the same trade seldom meet together, even for merriment or diversion, but the conversation ends in conspiracy against the public, or in some contrivance to raise prices. Adam Smith, The Wealth of Nations

Collusion means an arrangement (formal or informal) “among, or on behalf of, enterprises in the same line of business which is designed to limit competition among them” (Douglas Greer, 1992). Successful collusion occurs when “firms in an industry behave in such a way that, given the relevant supply and demand functions (including those of rivals), the combined profits of the entire set of firms is maximized (George Stigler, 1961). What is collusion?

A cartel is a formal system of coordination among rival sellers. For example, a cartel might establish (based on negotiation among members) prices, output quotas, or restricted selling territories.

Incentive to engage in coordinated action among sellers Failure among firms in tightly concentrated market structures could mean mutually destructive price wars. Seller coordination can be very profitable. Note that our duopolists, by action as joint monopolists, could have increased their payoff by $50 each. duopolists

Factors affecting the feasibility of (sustained) coordinated action among rival sellers Number of sellers Number of buyers Similarity of costs Product differentiation (or lack thereof). Collusion tends to be ineffective against large buyers

Modus operandi of seller coordination Price Leadership Examples: Northwest Airlines was price leader on the LA- Minneapolis route—it disclosed periodic adjustments in fares to its rival (US West) via a jointly used computerized reservation system. GE set turbine generator prices by applying a “multiplier” to number published in a pricing book. Westinghouse could then predict GE’s bids by advance knowledge of the multiplier. Use of a Joint Sales Agency Examples: DeBeers is a joint sales for diamond mining units worldwide. Also, the Southeastern Conference and the National Football League.

Modus operandi of seller coordination, continued Bid rigging Example: The Tennessee paving conspiracy Geographic Market Division Example: Basing point pricing in the steel industry Customer Allocation Focal Point Pricing: This is a system of “tacit” coordination. A set of retail prices(such as $9.95 or $3.95—as opposed to, say, $9.99 or $3.99) are established as “focal points”—that is, a method of silently communicating to rivals that you wish to avoid price competition where these items are concerned.