Economics Stack Exchange Archive

How can possible cartel building/existence be detected observing economical statistics?

• posted by: Hauser on 2011-10-14
• tagged: cartel, regulation
• score: 1

What are hints/evidences investigating annual reports of competing companies, comparing performance figures of companies or price volatility of sub-markets, so that governmental institutions/offices can check for existing cartels and suppress cartel building? Are there any unambiguous methods, so that pooling companies cannot decept governmental offices?

Answer 171

• posted by: Turukawa on 2011-10-15
• score: 2

There are a number of ways in which competitor prices for comparable products can come to be similar:

• Perfect competition: in an ideal market, one in which all prices and purchasing behaviour are transparent, it is likely that prices will converge simply through the price-discovery mechanism;
• Conscious collusion: competitors agree on pricing mechanisms, or even on who will win particular "competitive" bids, in order to increase profits;
• Conscious parallelism: competitors tacitly "agree" to raise prices simply by following suite (often seen when energy prices or banking fees are raised);
• Regulatory favouritism: some structure of the regulatory environment could favour the incumbents and artificially limit competition, or new entrants to a market, and so allow the incumbents to raise prices, or have them set artificially high, in a way that regulators encourage;
• Input dependence: it could be that an entire industry is dependent on a single critical supplier and this supplier has forced its customers to be "price takers" and so moving prices in parrallel;
• Guilds / Unions / Professional memberships: some industries are so heavily regulated that you may only enter them if approved by an industry body who then sets "standards" and approved "prices" - everything from healthcare to artisans to autoworkers can be governed by these;

The way of evaluating whether prices are "too" high is usually by comparison with equivalent industries which are judged to be competitive. If margins are judged to be high for an industry (or group of companies) relative to their competitors, or to the proxy comparative industry, then some form of artificial pricing could be taking place.

Figuring out where the difficulties are coming from can lead to creating "prisoner's dilemma" situations where the competition authorities offer an advantage to whoever breaks ranks in the cartel first. If collusion is due to regulatory factors or some artificial advantage, then improving competition is going to be more difficult than simply fining a few companies.

As for unambiguous tests? No, which is why many cartels operate for years and then take years to investigate. The European-wide vitamen cartel, bust in 2001, took two years to investigate. A similar investigation for the Pilkington-led glass cartel ended in 2007. They're not easy to discover and, you'll note, these high profile cases would imply that only large-scale monopolies happen. In my experience, such coercive pricing occurs at all levels, from small town key-cutters all agreeing to the same price, to industry-fixed prices through trade unions and artisans guilds.

Note that it isn't always in government interests or ability to break up cartel-like behaviour (see OPEC, healthcare, public-sector unions, etc.).

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