Do antitrust agencies facilitate meetings in smoke-filled rooms?

Abstract

This article identifies a potential adverse effect of antitrust enforcement. We show that if tacit collusion is not sustainable, firms are able and willing to collude explicitly when demand is viscous, the expected antitrust penalty is limited and antitrust agencies are sufficiently effective in catching cartels.

Keywords:

• tacit collusion
• explicit collusion
• antitrust enforcement

JEL Classification:

• D43
• L13
• L41

Acknowledgements

The comments by Stephen Davies and Matthew Olczak are gratefully acknowledged. R. Peeters recognizes the financial support of the Netherlands Organization for Scientific Research (NWO).

Notes

¹ See Davies and Olczak (2008) for a recent empirical study, indicating that the standard theoretical framework for collusion does not apply equally well to tacit and overt collusion. For a general discussion, see Chapter 4 of Motta (2004) and Chapter 2 of Whinston (2006).

² Many more explanations for consumer inertia can be found in Klemperer (1995).

³ See Bos et al. (2012) for a justification and discussion of the underlying modelling assumptions.

⁴ Notice that the parameter p captures the degree of demand viscosity. Specifically, higher values of p correspond to lower switching costs, more price awareness or less brand loyalty.

⁵ This assumption is not fundamental to our finding. In principle, any future reward would suffice. For details, see Pot et al. (2011) and Bos et al. (2012).

⁶ Martin (2006) provides a theoretical analysis, showing that explicit collusion may be more profitable as it has the potential to reduce the incentives to defect.

⁷ A case study of the sugar-refining cartel performed by Genesove and Mullin (2001) clearly illustrates how communication may play an essential role in sustaining a collusive agreement.

⁸ There is a growing literature studying the role of communication in collusion when part of the (history of) actions is private information. See Harrington and Skrzypacz (2010) and the references therein.

⁹ McCutcheon (1997) shows that antitrust enforcement may also have adverse effects when it makes renegotiating the collusive agreement sufficiently costly. The idea that antitrust laws may facilitate collusion by making communication costly is confirmed experimentally by Andersson and Wengström (2007).