Research Program on Cartels, Collusion and Mergers
Program Director: Robert C.Marshall.
Members: Kalyan Chatterjee, Edward Green, Kala Krishna, Vijay Krishna, Joris Pinkse, Quang Vuong.
The suppression of interfirm rivalry can be highly profitable. In many industries the incremental payoffs from collusion are quite large while the effort to attain those incremental profits is relatively small. Effective collusion usually requires some kind of allocation mechanism; fixed market share or geographic divisions are two common examples. Our faculty are investigating a number of issues concerning tacit and explicit collusion, and thus their research is directly applicable to coordinated effects analysis with mergers.
Often an auction or procurement is the direct focus of collusive behavior. Even if it is not because the cartel is organized around, say, a market share allocation scheme, at the end of the day bidder collusion is required to attain the desired outcomes. Bidder collusion can be detected, and collusive arrangements among bidders can be quite difficult to implement for the parties themselves. Our faculty are investigating the conditions of sustainable collusion and the susceptibility of various auction/procurement schemes to collusion. The resulting models provide some testable implications on observed bids that can be used to detect collusion. There are many factors that can contribute to low bids in an auction context and high bids in a procurement context - accounting for these factors is typically important when assessing whether bidding was collusive. Work in this regard has been conducted for Forest Service timber sales as well as school milk procurements. In a different setting, bid protests by firms in procurements tend to encourage collusion as settlement can be used as a legal channel for side payments. Such court cases have been observed in procurements of telecommunication and computer equipment. A research project involving a unique data set of construction procurements ("Bos" shadow account) in which bidders have acknowledged collusion and have given information on side payments, will provide more insights on the formation of collusion and its sustainability.
Every year competition enforcement authorities around the world unearth cartels that are significantly impacting large amounts of commerce. Our faculty have studied the international vitamins cartel, which was a market share allocation cartel, and have analyzed the use of coordinated price announcements by that cartel. In the context of international markets, firms can use export quotas as a collusive device when competition among firms is limited.
The payoff to incremental post-merger collusion can be addressed through extensions of asymmetric auction/procurement models. Our faculty are ideally suited to handle the difficult calibration and numerical issues associated with these analyses. This line of study has the potential to provide significant quantification to coordinated effects analysis of mergers.
Another related issue is the formation of coalitions and their communication structure. Some laboratory experiments are expected to provide key insights on these issues.