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Prof. Amine Ouazad LLM in International Business Law, March 28 2014. Microeconomics/Industry Analysis Session #2: Collusion. Outline for Session #2. Price & Quantity Wars: Strategic thinking Sustaining Collusion Deterring Collusion. Price wars. Interactions between markets
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LLM in International Business Law, March 28 2014Microeconomics/Industry AnalysisSession #2: Collusion
Interactions between markets
Epson & HP 1989
Epson producing cheap inkjet printer
HP producing high-priced laser printers
Epson introduces cheap laser printer…
Put yourself in your competitor’s shoes: Chile’s shampoo war
1993: Unilever largest seller of shampoo (Sedal brand)
1993: Procter and Gamble introduces Pantene brandand capture market share equal to Sedal’s.
P&G cuts prices to capture Sedal’s market shares. Outcome??
Inkjet printer anyone?
The prisoners’ dilemma:
• 1986: Nynex charged $10,000 per disk for NY directory
• ProCD and Digital Directory Assistance
• Chinese workers at $3.50 daily wage
• Bertrand or Price Competition → Free
Encyclopedia Britannica vs. Encarta
1991: EB sold @ $1,600
1992: Microsoft introduced Encarta, sold @ $49.95
1995: EB’s sales have halved
1995: EB offers online subscription for $120 p.a. or CD for $200
1996: EB lowers cost of subscription to $85
1999: EB offers FREE on-line service (www.britannica.com)
Today: <$20 for DVD; $100 for online subscription
☞ January 1992: Face lowest prices in the history of lysine.
High prices lead to higher profits, but each firm has an incentive to deviate.
Cooperate as long as the rivals do.
Upon observing a defection: immediately revert to a period of punishment of specified length in which everyone plays non-cooperatively
Grim Trigger Strategy (GTS)
Start off setting production at the low production leveland continue to do so until the other firm cheats by producing more.
If the other firm cheats, set high output per year forever.Trigger Strategies to Enforce Collusive Outcome
PV (collude) =
PV (cheat) =
“Monthly scorecards were prepared and discussed at quarterly meetings, based on reported sales volumes of each firm. To verify reported sales volumes, international trade statistics were available.”
Gains from cooperation must exceed net gain from cheating and being punished
You would collude if PV of colluding > PV of cheating
703.125+703.125/r > 781.25+625/r → r < 1 (100%)
This condition always holds.
Key take-away point: If detection is certain and punishment is quick…
“Grim Trigger Strategy” can effectively deter cheating and ensure collusion
AND: Conditions on the Lysine market (e.g. only a few major players, frequent meetings, international trade statistics) were very conducive to trigger strategies working!Collusion: Weighing Costs and Benefits
How long do you need to punish your partner to make him or her cooperate all the time??
Very impatient partner ??
Ajinomoto CEO: “cheating was frequent but the range of cheating was not too big ... they kept their promise about 90 percent. Something like that.”
Mark Whitacre (Matt Damon) is the Informant.
FBI raid at ADM’s offices.
Price declines to the competitive price.
December :ADM & Ajinomoto executives indicted.
ADM Fined $100M. Additional legal costs of $640M.
Extra Profit of collusion ?? 78.125+78.125/0.05 > $1b if done forever !!How Did This All End?
U.S. Attorney GeneralJanet Reno:"This $100 million criminal fine should send a message to the entire world.”
Lost consumer surplus?
Incentives to collude?
“The indictment and information further charge that the defendants and co-conspirators:
[…] “The defendants are charged with violating Section 1 of the Sherman Act, which carries a maximum fine of $10 million for corporations and a maximum penalty of three years imprisonment and a $350,000 fine for individuals.
The fines for both corporations and individuals may be increased to twice the gain derived from the crime by the defendant or twice the loss suffered by the victims of the crime, if either of those amounts is greater than the statutory maximum fine of $10 million for corporations and $350,000 for individuals.”
Lost consumer surplus?
Total Cartel Profits
Profit with competition
US/EU Leniency policy?