Essays in the Economics of Explicit Collusion
Open Access
- Author:
- Kumar, Vikram
- Graduate Program:
- Economics
- Degree:
- Doctor of Philosophy
- Document Type:
- Dissertation
- Date of Defense:
- June 18, 2013
- Committee Members:
- Robert Clifford Marshall, Dissertation Advisor/Co-Advisor
Robert Clifford Marshall, Committee Chair/Co-Chair
Leslie M Marx, Committee Chair/Co-Chair
Edward James Green, Committee Member
Vijay Krishna, Committee Member
Anthony Mark Kwasnica, Committee Member
Leslie M Marx, Special Member - Keywords:
- Cartel
Collusion
Procurement
Merger
Monopolization
Price Announcements
Endogenous Quantity - Abstract:
- CHAPTER 1 (with Robert C. Marshall, Leslie M. Marx and Lily Samkharadze): Buyer Resistance for Cartel versus Merger Procurement practices are affected by uncertainty regarding suppliers’ costs, the na- ture of competition among suppliers, and uncertainty regarding possible collusion among suppliers. Buyers dissatisfied with bids of incumbent suppliers can cancel their procure- ments and resolicit bids after qualifying additional suppliers. Recent cartel cases show that cartels devote considerable attention to avoiding such resistance from buyers. We show that in a procurement setting with the potential for buyer resistance, the payoff to firms from forming a cartel exceeds that from merging. Thus, firms considering a merger may have an incentive to collude instead. We discuss implications for antitrust and merger policy. CHAPTER 2: Collusive Price Announcements with Strategic Buyers The international vitamins cartel that operated in the 1980s and 90s issued coordinated public price announcements in an attempt to influence prices. This was done in an envi- ronment where buyers had the ability to take incremental actions to increase competition among the sellers. A particularly striking feature of the price announcements was their arrival in gradual increments which, in turn, served to raise transaction prices gradually. Motivated by these observations, this paper constructs a two period dynamic model of (explicitly) collusive price announcements, featuring a buyer who can (at a cost) increase competition in the procurements it conducts by qualifying a non-cooperative “outside” seller. In this setting, the paper shows that there exists an explicitly collusive mechanism that for an interesting range of parameter values exhibits gradually increasing price an- nouncements, resulting in transaction prices that rise gradually. Moreover, the cartel in our model obtains payoffs greater than those under competition by submitting bids that are completely indistinguishable from non-cooperative bids. Thus, the paper not only for- malizes the notion that a cartel may raise prices gradually to counter buyer “resistance”, but also highlights the role of a cartel’s price announcements in doing so. Understanding the latter aspect of collusive pricing is of particular interest because issuing public price announcements can be consistent even with non-cooperative conduct. CHAPTER 3: Collusion in Auctions with Endogenous Quantity: A Numerical Exploration The effects of the presence of a non all-inclusive bidding ring on the outcome of en- dogenous demand procurements is explored. We build on Hansen (1988), where a buyer with a publicly known demand curve conducts a procurement, and the quantity trans- acted is a function of the bids. In a first-price procurement (FPP) the per unit transac- tion price equals the lowest bid and the quantity transacted corresponds to that price. The transaction price and quantity are determined analogously in a second-price pro- curement. Numerical results show that irrespective of the underlying demand curve, the buyer and the non-cartel bidder prefer the endogenous demand FPP over the endogenous demand SPP. However, while the cartel prefers the SPP over the FPP for relatively inelas- tic demand curves, for sufficiently elastic demand curves it prefers the FPP over the SPP. The numerical exercises also suggest that although the payoff for two out of three sellers to form a cartel is lower in a FPP than an SPP when demand is relatively inelastic, when demand is sufficiently elastic, the incentive to form such a cartel is higher in an FPP than an SPP.