Collusion at the Extensive Margin (Presentation)
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Transcript of Collusion at the Extensive Margin (Presentation)
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Collusion at the Extensive Margin
Martin ByfordRMIT University
Joshua GansUniversity of Melbourne
September 2010
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Introduction
Collusion at the Extensive
Margin
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
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Introduction
Collusion at the intensive margininvolves rms coordinating their strategic actions within the markets in which they come into contact.
Collusion at the Extensive
Margin
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
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Introduction
Collusion at the intensive margininvolves rms coordinating their strategic actions within the markets in which they come into contact.
Collusion at the extensive margin involves rms coordinating their participation across markets in order to avoid coming into contact.
Collusion at the Extensive
Margin
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
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Introduction
Collusion at the intensive margininvolves rms coordinating their strategic actions within the markets in which they come into contact.
Collusion at the extensive margin involves rms coordinating their participation across markets in order to avoid coming into contact.
This paper is the rst to develop a theoretical framework for analysing collusion at the extensive margin.
Collusion at the Extensive
Margin
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
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Motivating Case
Collusion at the Extensive
Margin
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
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Motivating Case
In 2001 the Australian Competition and Consumer Commission took
Rural Press and Waikerie to the Federal Court of Australia alleginganti-competitive agreement, exclusionary conduct and abuse of market power.
Collusion at the Extensive
Margin
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
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Motivating Case
In 2001 the Australian Competition and Consumer Commission took
Rural Press and Waikerie to the Federal Court of Australia alleginganti-competitive agreement, exclusionary conduct and abuse of market power.
The matter went all the way to the High Court of Australia with the
anti-competitive agreement case upheld.
Collusion at the Extensive
Margin
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
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Motivating Case
In 2001 the Australian Competition and Consumer Commission took
Rural Press and Waikerie to the Federal Court of Australia alleginganti-competitive agreement, exclusionary conduct and abuse of market power.
The matter went all the way to the High Court of Australia with the
anti-competitive agreement case upheld.
The basic story was one of collusion at the extensive margin.
Collusion at the Extensive
Margin
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
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Rural Press and Waikerie
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Rural Press and Waikerie
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Rural Press and Waikerie
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Rural Press and Waikerie
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Entry by the River News
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Entry by the River News
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The Threat
The attached copies of pages from The River News were sent to me lastweek. The Mannum advertising was again evident, which suggests yourWaikerie operator, John Pick, is still not focussing on the traditional area of operations.
I wanted to formally record my desire to reach an understanding with yourfamily in terms of where each of us focuses our publishing efforts.
If you continue to attack in Mannum, a prime readership area of the MurrayValley Standard, it may be we will have to look at expanding our operationsinto areas that we have not traditionally services [sic].
I thought I would write to you so there could be no misunderstanding ourposition. I will not bother you again on this subject.
Collusion at the Extensive
Margin
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Ian Law, Rural Press, 7 April 1998
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The Threat
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The Threat
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The Response
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The Response
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Other Relevant Cases
Collusion at the Extensive
Margin
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
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Other Relevant Cases
In Bell Atlantic v. Twombly it was alleged that the Baby Bells conspired to restrict competition for local telephone services by failing toexpand into one and others territories.
Collusion at the Extensive
Margin
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
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Other Relevant Cases
In Bell Atlantic v. Twombly it was alleged that the Baby Bells conspired to restrict competition for local telephone services by failing toexpand into one and others territories.
The Supreme Court held that parallel conduct alone does notcreate a plausible inference of an illegal arrangement.
Collusion at the Extensive
Margin
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
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Other Relevant Cases
In Bell Atlantic v. Twombly it was alleged that the Baby Bells conspired to restrict competition for local telephone services by failing toexpand into one and others territories.
The Supreme Court held that parallel conduct alone does notcreate a plausible inference of an illegal arrangement.
Apple followed Googles entry into the smart phone market by purchasing the mobile advertising company Quattro Wireless andannouncing the iAds service.
Collusion at the Extensive
Margin
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
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Other Relevant Cases
In Bell Atlantic v. Twombly it was alleged that the Baby Bells conspired to restrict competition for local telephone services by failing toexpand into one and others territories.
The Supreme Court held that parallel conduct alone does notcreate a plausible inference of an illegal arrangement.
Apple followed Googles entry into the smart phone market by purchasing the mobile advertising company Quattro Wireless andannouncing the iAds service.
It was reported that Apples action was a reprisal against Googlefollowing Googles violation of a gentlemans agreement. (Stone &Helft, 2010)
Collusion at the Extensive
Margin
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
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I d i
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Contrasting Literature
Collusion at the Extensive
Margin
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
I t d ti
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Contrasting Literature
Edwards (1955) discussed mutual forbearance by conglomerates.
Collusion at the Extensive
Margin
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
I t d ti
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Contrasting Literature
Edwards (1955) discussed mutual forbearance by conglomerates.
Stigler (1964) argues that while colluding at the extensive margin may produce the most robust collusive agreements, these agreements areeasy to detect.
Collusion at the Extensive
Margin
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Introduction
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Contrasting Literature
Edwards (1955) discussed mutual forbearance by conglomerates.
Stigler (1964) argues that while colluding at the extensive margin may produce the most robust collusive agreements, these agreements areeasy to detect.
Green and Porter (1984) show that rms may employ temporary punishments to facilitate collusion in the presence of uncertainty.
Collusion at the Extensive
Margin
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Introduction
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Contrasting Literature
Edwards (1955) discussed mutual forbearance by conglomerates.
Stigler (1964) argues that while colluding at the extensive margin may produce the most robust collusive agreements, these agreements areeasy to detect.
Green and Porter (1984) show that rms may employ temporary punishments to facilitate collusion in the presence of uncertainty.
Bernheim and Whinston (1990) show that multi-market contact canfacilitate collusion by pooling participation constraints.
Collusion at the Extensive
Margin
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Introduction
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Contrasting Literature
Edwards (1955) discussed mutual forbearance by conglomerates.
Stigler (1964) argues that while colluding at the extensive margin may produce the most robust collusive agreements, these agreements areeasy to detect.
Green and Porter (1984) show that rms may employ temporary punishments to facilitate collusion in the presence of uncertainty.
Bernheim and Whinston (1990) show that multi-market contact canfacilitate collusion by pooling participation constraints.
Athey, Bagwell and Sanchirico (2003) show that rms may keep pricesrigid to assist in preserving the stability of a collusive outcome.
Collusion at the Extensive
Margin
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Introduction
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Contrasting Literature
Edwards (1955) discussed mutual forbearance by conglomerates.
Stigler (1964) argues that while colluding at the extensive margin may produce the most robust collusive agreements, these agreements areeasy to detect.
Green and Porter (1984) show that rms may employ temporary punishments to facilitate collusion in the presence of uncertainty.
Bernheim and Whinston (1990) show that multi-market contact canfacilitate collusion by pooling participation constraints.
Athey, Bagwell and Sanchirico (2003) show that rms may keep pricesrigid to assist in preserving the stability of a collusive outcome.
Fershtman and Pakes (2000) use a semi-collusive Markov perfect
equilibrium to isolate collusion on a single dimension.
Collusion at the Extensive
Margin
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Introduction
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Bernheim-Whinston (1990)
Collusion at the Extensive
Margin
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Introduction
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Bernheim-Whinston (1990)
Simple intuition: rms should enter multiple markets to improvecartel stability.
Collusion at the Extensive
Margin
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Introduction
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Bernheim-Whinston (1990)
Simple intuition: rms should enter multiple markets to improvecartel stability.
Complication: requires some combination of non-identical rms,markets and non-constant returns to scale.
Collusion at the Extensive
Margin
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Introduction
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Bernheim-Whinston (1990)
Simple intuition: rms should enter multiple markets to improvecartel stability.
Complication: requires some combination of non-identical rms,markets and non-constant returns to scale.
That is, multi-market contact is irrelevant with identical rms,markets and constant returns to scale.
Collusion at the Extensive
Margin
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Introduction
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Bernheim-Whinston (1990)
Simple intuition: rms should enter multiple markets to improvecartel stability.
Complication: requires some combination of non-identical rms,markets and non-constant returns to scale.
That is, multi-market contact is irrelevant with identical rms,markets and constant returns to scale.
Did not consider the possibility that collusion might involve marketforbearance.
Collusion at the Extensive
Margin
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Introduction
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Research Questions
Collusion at the Extensive
Margin
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Introduction
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Research Questions
What conditions support collusion at the extensive margin?
Collusion at the Extensive
Margin
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Introduction
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Research Questions
What conditions support collusion at the extensive margin?
How does the presence of multiple markets facilitate collusion?
Collusion at the Extensive
Margin
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Introduction
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Research Questions
What conditions support collusion at the extensive margin?
How does the presence of multiple markets facilitate collusion?
How do different enforcement mechanisms perform in terms of stability and expected returns?
Collusion at the Extensive
Margin
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Introduction
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Research Questions
What conditions support collusion at the extensive margin?
How does the presence of multiple markets facilitate collusion?
How do different enforcement mechanisms perform in terms of stability and expected returns?
What are the implications for anti-trust policy of collusion takingplace at the extensive margin?
Collusion at the Extensive
Margin
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
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The Model
Introduction
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Primitives
Collusion at the Extensive
Margin
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Uncertainty
Anti-Trust
UnitingFrameworks
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Primitives
A nite set I of rms.
Collusion at the Extensive
Margin
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Uncertainty
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Primitives
A nite set I of rms.
A nite set N of distinct markets or separable market segments.
Collusion at the Extensive
Margin
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Introduction
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Primitives
A nite set I of rms.
A nite set N of distinct markets or separable market segments.
Entry into a market costs a rm an amount c. The cost of maintaining a presence is captured in the prot function.
Collusion at the Extensive
Margin
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Introduction
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Primitives
A nite set I of rms.
A nite set N of distinct markets or separable market segments.
Entry into a market costs a rm an amount c. The cost of maintaining a presence is captured in the prot function.
Each market is modelled as a repeated simultaneous moves non-cooperative game.
Collusion at the Extensive
Margin
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Introduction
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Primitives
A nite set I of rms.
A nite set N of distinct markets or separable market segments.
Entry into a market costs a rm an amount c. The cost of maintaining a presence is captured in the prot function.
Each market is modelled as a repeated simultaneous moves non-cooperative game.
The game has an innite number of periods. All rms have identicaldiscount rate, . Collusion at
the Extensive
Margin
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
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Timing
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Period t
Timing
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Period t
ParticipationStage
Timing
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Period t
ParticipationStage
State Revealed
Timing
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Period t
ParticipationStage
State Revealed
MarketStage
Timing
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Period t
ParticipationStage
State Revealed InstantaneousProts Realised
MarketStage
Timing
Introduction
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Markov Perfect Equilibrium
Collusion at the Extensive
Margin
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
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Markov Perfect Equilibrium
The general model nests Bernheim and Whinstons (1990) model of multi-market contact. From the perspective of the basic framework
the key addition is the inclusion of the participation stage.
Collusion at the Extensive
Margin
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Introduction
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Markov Perfect Equilibrium
The general model nests Bernheim and Whinstons (1990) model of multi-market contact. From the perspective of the basic framework
the key addition is the inclusion of the participation stage.
In order to rene the (very large) set of subgame perfect equilibriawe conne our attention to the set of Markov Perfect equilibria(MPE).
Collusion at the Extensive
Margin
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Introduction
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Markov Perfect Equilibrium
The general model nests Bernheim and Whinstons (1990) model of multi-market contact. From the perspective of the basic framework
the key addition is the inclusion of the participation stage.
In order to rene the (very large) set of subgame perfect equilibriawe conne our attention to the set of Markov Perfect equilibria(MPE).
In the market stage the payoff relevant information is the prole of rm participation resulting from actions in the participation stage.
Collusion at the Extensive
Margin
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Introduction
h d l
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Markov Perfect Equilibrium
The general model nests Bernheim and Whinstons (1990) model of multi-market contact. From the perspective of the basic framework
the key addition is the inclusion of the participation stage.
In order to rene the (very large) set of subgame perfect equilibriawe conne our attention to the set of Markov Perfect equilibria(MPE).
In the market stage the payoff relevant information is the prole of rm participation resulting from actions in the participation stage.
In the participation stage the payoff relevant information is the proleof rm participation from the previous period. This prole dictatesfor which markets a rm must pay an entry cost if it wishes toparticipate in the market in the current period.
Collusion at the Extensive
Margin
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Introduction
Th M d l
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Lemma 1
Collusion at the Extensive
Margin
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Collusive Equilibria
Uncertainty
Anti-Trust
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Th M d l
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Lemma 1
Assumption 1: In a one shot game each market produces a unique(expected) equilibrium payoff vector for each prole of participation.
Collusion at the Extensive
Margin
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
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Th M d l
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Lemma 1
Assumption 1: In a one shot game each market produces a unique(expected) equilibrium payoff vector for each prole of participation.
Initially we assume that markets are identical, separable andsymmetric. The paper contains a richer model in which markets andrms are permitted to be heterogeneous.
Collusion at the Extensive
Margin
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Introduction
The Model
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Lemma 1
Assumption 1: In a one shot game each market produces a unique(expected) equilibrium payoff vector for each prole of participation.
Initially we assume that markets are identical, separable andsymmetric. The paper contains a richer model in which markets andrms are permitted to be heterogeneous.
Oligopolistic prot to a rm in a market with q participants arewritten *(q).
Collusion at the Extensive
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Lemma 1
Assumption 1: In a one shot game each market produces a unique(expected) equilibrium payoff vector for each prole of participation.
Initially we assume that markets are identical, separable andsymmetric. The paper contains a richer model in which markets andrms are permitted to be heterogeneous.
Oligopolistic prot to a rm in a market with q participants arewritten *(q).
Lemma 1: In a Markov perfect equilibrium (MPE) each rm takes itsstatic Nash equilibrium action in the market stage , subject to theprevailing prole of participation.
Collusion at the Extensive
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Competitive Equilibrium
Collusion at the Extensive
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Competitive Equilibrium
Assumption 2 (Expansion Incentive): Entry into an additional marketis always protable for a rm, holding the participation of the
remaining rms constant.
Collusion at the Extensive
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Competitive Equilibrium
Assumption 2 (Expansion Incentive): Entry into an additional marketis always protable for a rm, holding the participation of the
remaining rms constant.
The strong version of assumption 2 requires MPE instantaneousprot to satisfy *(m) > *(m + 1) > c for all m I .
Collusion at the Extensive
Margin
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Competitive Equilibrium
Assumption 2 (Expansion Incentive): Entry into an additional marketis always protable for a rm, holding the participation of the
remaining rms constant.
The strong version of assumption 2 requires MPE instantaneousprot to satisfy *(m) > *(m + 1) > c for all m I .
Proposition 1 (Competitive Equilibrium): Where assumptions 1 and2 hold it is always an MPE for all rms to enter and remain in every market.
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Collusive Equilibria
Introduction
The Model
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Collusive Equilibria
Collusion at the Extensive
Margin
Collusive Equilibria
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Anti-Trust
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Introduction
The Model
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Collusive Equilibria
Where collusion takes place at the extensive margin a collusiveagreement has two components:
Collusion at the Extensive
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Collusive Equilibria
Uncertainty
Anti-Trust
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Collusive Equilibria
Where collusion takes place at the extensive margin a collusiveagreement has two components:
A partition P of the set N of markets that assigns each market to arm or to a contested component of the partition in which all rmsparticipate. A collusive partition is characterised by the number of markets n i in each rm is component of the partition.
Collusion at the Extensive
Margin
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Introduction
The Model
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Collusive Equilibria
Where collusion takes place at the extensive margin a collusiveagreement has two components:
A partition P of the set N of markets that assigns each market to arm or to a contested component of the partition in which all rmsparticipate. A collusive partition is characterised by the number of markets n i in each rm is component of the partition.
An enforcement mechanism that utilises the threat of reciprocal entry to counter the expansion incentive.
Collusion at the Extensive
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Partitioning Contests
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Contested
Introduction
The Model
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Grim Strategy Enforcement
Collusion at the Extensive
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Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Introduction
The Model
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Grim Strategy Enforcement
Grim strategy enforcement requires permanent reversion to thecompetitive equilibrium as soon as any rm is observed deviatingfrom the collusive partition.
Collusion at the Extensive
Margin
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Introduction
The Model
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Grim Strategy Enforcement
Grim strategy enforcement requires permanent reversion to thecompetitive equilibrium as soon as any rm is observed deviatingfrom the collusive partition.
With identical, separable and symmetric markets grim strategy collusion requires that MPE instantaneous prots decrease at rate
that is more than proportional to a change in participation: *(1)/ m > *(m).
Collusion at the Extensive
Margin
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
f
Introduction
The Model
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Grim Strategy Enforcement
Grim strategy enforcement requires permanent reversion to thecompetitive equilibrium as soon as any rm is observed deviatingfrom the collusive partition.
With identical, separable and symmetric markets grim strategy collusion requires that MPE instantaneous prots decrease at rate
that is more than proportional to a change in participation: *(1)/ m > *(m).
Collusion at the Extensive
Margin
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
GS = maxiI
j = in j
(2) cn i (1) (I ) + j = i n j (2) (I ) c
Initial Deviation (t = 1)
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Contested
Initial Deviation (t = 1)
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Contested
Grim Strategy Enforcement (t 2)
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Contested
E C
Introduction
The Model
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Entry Costs
Collusion at the Extensive
Margin
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
E C
Introduction
The Model
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Entry Costs
The value of critical for the stability of the cartel is decreasing in theentry cost c as barriers to entry decrease the returns to a deviation.
Collusion at the Extensive
Margin
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
E C
Introduction
The Model
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Entry Costs
The value of critical for the stability of the cartel is decreasing in theentry cost c as barriers to entry decrease the returns to a deviation.
Innitesimal entry cost need not prevent collusive partition of markets.
Collusion at the Extensive
Margin
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
E t C t
Introduction
The Model
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Entry Costs
The value of critical for the stability of the cartel is decreasing in theentry cost c as barriers to entry decrease the returns to a deviation.
Innitesimal entry cost need not prevent collusive partition of markets.
Where c goes to zero and N is at least as large as I there exists apartition P that assigns an equal number of markets to each member of the cartel which is stable for sufciently high .
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Uncer tainty and Tit-for-Tat Equilibria
Tit f T t E f t
Introduction
The Model
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Tit-for-Tat Enforcement
Collusion at the Extensive
Margin
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Tit f T t E f t
Introduction
The Model
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Tit-for-Tat Enforcement
Where punishments may be triggered along the equilibrium path, or a subset of markets display natural monopoly characteristics, a cartelmay prefer an enforcement mechanism with temporary punishments.
Collusion at the Extensive
Margin
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Tit for Tat Enforcement
Introduction
The Model
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Tit-for-Tat Enforcement
Where punishments may be triggered along the equilibrium path, or a subset of markets display natural monopoly characteristics, a cartelmay prefer an enforcement mechanism with temporary punishments.
At the intensive margin temporary punishments tend to only vary in terms of length.
Collusion at the Extensive
Margin
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Tit for Tat Enforcement
Introduction
The Model
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Tit-for-Tat Enforcement
Where punishments may be triggered along the equilibrium path, or a subset of markets display natural monopoly characteristics, a cartelmay prefer an enforcement mechanism with temporary punishments.
At the intensive margin temporary punishments tend to only vary in terms of length.
Single period punishments can be effective at the extensive margin.Moreover, punishments can be targeted at individual rms and scaled to match the size of an initial deviation.
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Margin
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UnitingFrameworks
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Initial Deviation (t = 1)
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Contested
Initial Deviation (t = 1)
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Contested
Initial Deviation (t = 1)
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Initial Deviation (t = 1)
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Gain in Period 1
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Gain in Period 1
Loss in Period 1
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The Model
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Multilateral Enforcement
Collusion at the Extensive
Margin
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Multilateral EnforcementIntroduction
The Model
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Multilateral Enforcement
Multilateral enforcement requires a deviation to be punished by temporary reversion to the competitive equilibrium.
Collusion at the Extensive
Margin
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Multilateral EnforcementIntroduction
The Model
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Multilateral Enforcement
Multilateral enforcement requires a deviation to be punished by temporary reversion to the competitive equilibrium.
If at least one rm is present in another rms market, and at leastone rm is not present in every market, then all rms enter every market.
Collusion at the Extensive
Margin
Collusive Equilibria
Uncertainty
Anti-Trust
UnitingFrameworks
Multilateral EnforcementIntroduction
The Model
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Multilateral Enforcement
Multilateral enforcement requires a deviation to be punished by temporary reversion to the competitive equilibrium.
If at least one rm is present in another rms market, and at leastone rm is not present in every market, then all rms enter every market.
Otherwise all rms withdraw from every market belonging to a rivalplayer.
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Multilateral Response (t = 2)
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Contested
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Gain in Period 1
Loss in Period 1
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Gain in Period 2
Gain in Period 1
Loss in Period 1
Tit-for-Tat Response (t = 2)
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Gain in Period 2
Loss in Period 2
Gain in Period 1
Loss in Period 1
Heavy-Handed EnforcementIntroduction
The Model
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Heavy Handed Enforcement
Collusion at the Extensive
Margin
q
Uncertainty
Anti-Trust
UnitingFrameworks
Heavy-Handed EnforcementIntroduction
The Model
Collusive Equilibria
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Heavy Handed Enforcement
The heavy-handed enforcement mechanism treats each pair of rmsindependently.
Collusion at the Extensive
Margin
q
Uncertainty
Anti-Trust
UnitingFrameworks
Heavy-Handed EnforcementIntroduction
The Model
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Heavy Handed Enforcement
The heavy-handed enforcement mechanism treats each pair of rmsindependently.
For each pair of rms {i, j }, if rm i is present in at least one of rm j s markets, and rms i and j are not present in all of each othersmarkets, then both rms enter all of each others markets.
Collusion at the Extensive
Margin
Uncertainty
Anti-Trust
UnitingFrameworks
Heavy-Handed EnforcementIntroduction
The Model
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Heavy Handed Enforcement
The heavy-handed enforcement mechanism treats each pair of rmsindependently.
For each pair of rms {i, j }, if rm i is present in at least one of rm j s markets, and rms i and j are not present in all of each othersmarkets, then both rms enter all of each others markets.
Otherwise rms i and j withdraw from every market belonging to the other player.
Collusion at the Extensive
Margin
Uncertainty
Anti-Trust
UnitingFrameworks
Heavy Handed Response (t = 2)
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Contested
Heavy Handed Response (t = 2)
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Contested
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Gain in Period 1
Loss in Period 1
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Gain in Period 2
Gain in Period 1
Loss in Period 1
Tit-for-Tat Response (t = 2)
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Gain in Period 2
Loss in Period 2
Gain in Period 1
Loss in Period 1
Proportional Response EnforcementIntroductionThe Model
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p p
Collusion at the Extensive
Margin
Uncertainty
Anti-Trust
UnitingFrameworks
Proportional Response EnforcementIntroductionThe Model
Collusive Equilibria
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p p
The proportional response enforcement mechanism treats each pair of rms independently as well as scaling punishments to the initial
transgression.
Collusion at the Extensive
Margin
Uncertainty
Anti-Trust
UnitingFrameworks
Proportional Response EnforcementIntroductionThe Model
Collusive Equilibria
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p p
The proportional response enforcement mechanism treats each pair of rms independently as well as scaling punishments to the initial
transgression.
For each pair of rms {i, j }, if rm i is present in at least one of rm j s markets, and rms i and j are not present in an equal number of each others markets, then the rm in the fewest of its rivals contestsenters additional contests sufcient to equalise cross participation.
Collusion at the Extensive
Margin
Uncertainty
Anti-Trust
UnitingFrameworks
Proportional Response EnforcementIntroductionThe Model
Collusive Equilibria
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p p
The proportional response enforcement mechanism treats each pair of rms independently as well as scaling punishments to the initial
transgression.
For each pair of rms {i, j }, if rm i is present in at least one of rm j s markets, and rms i and j are not present in an equal number of each others markets, then the rm in the fewest of its rivals contestsenters additional contests sufcient to equalise cross participation.
Otherwise rms i and j withdraw from every market belonging to the other player.
Collusion at the Extensive
Margin
Uncertainty
Anti-Trust
UnitingFrameworks
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Contested
Proportional Response Response (t = 2)
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Contested
Tit-for-Tat Response (t = 2)
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Gain in Period 1
Loss in Period 1
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Gain in Period 2
Gain in Period 1
Loss in Period 1
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Gain in Period 2
Loss in Period 2
Gain in Period 1
Loss in Period 1
Return to the Equilibrium Path (t > 2)
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Contested
Stability ConditionsIntroductionThe Model
Collusive Equilibria
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Collusion at the Extensive
Margin
Uncertainty
Anti-Trust
UnitingFrameworks
Stability ConditionsIntroductionThe Model
Collusive Equilibria
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Collusion at the Extensive
Margin
Uncertainty
Anti-Trust
UnitingFrameworks
Stability ConditionsIntroductionThe Model
Collusive Equilibria
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Collusion at the Extensive
Margin
Uncertainty
Anti-Trust
UnitingFrameworks
Uncer tainty and Tit-for-Tat EnforcementIntroductionThe Model
Collusive Equilibria
i
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Collusion at the Extensive
Margin
Uncertainty
Anti-Trust
UnitingFrameworks
Uncer tainty and Tit-for-Tat EnforcementIntroductionThe Model
Collusive Equilibria
U i
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Suppose that with some small probability a player makes a mistakeand enters too many markets in the participation stage. Supposefurther that this mistake is commonly observed.
Collusion at the Extensive
Margin
Uncertainty
Anti-Trust
UnitingFrameworks
Uncer tainty and Tit-for-Tat EnforcementIntroductionThe Model
Collusive Equilibria
U t i t
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Suppose that with some small probability a player makes a mistakeand enters too many markets in the participation stage. Supposefurther that this mistake is commonly observed.
The expected cost to rms of a mistake is higher under heavy handed enforcement than under proportional response enforcement.It follows that proportional response enforcement is payoff dominant.
Collusion at the Extensive
Margin
Uncertainty
Anti-Trust
UnitingFrameworks
Uncer tainty and Tit-for-Tat EnforcementIntroductionThe Model
Collusive Equilibria
U t i t
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Suppose that with some small probability a player makes a mistakeand enters too many markets in the participation stage. Supposefurther that this mistake is commonly observed.
The expected cost to rms of a mistake is higher under heavy handed enforcement than under proportional response enforcement.It follows that proportional response enforcement is payoff dominant.
Multilateral enforcement may be stable where proportional response
enforcement is not.
Collusion at the Extensive
Margin
Uncertainty
Anti-Trust
UnitingFrameworks
Uncer tainty and Tit-for-Tat EnforcementIntroductionThe Model
Collusive Equilibria
Uncertainty
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Suppose that with some small probability a player makes a mistakeand enters too many markets in the participation stage. Supposefurther that this mistake is commonly observed.
The expected cost to rms of a mistake is higher under heavy handed enforcement than under proportional response enforcement.It follows that proportional response enforcement is payoff dominant.
Multilateral enforcement may be stable where proportional response
enforcement is not.
(Caveat: It is possible to design perverse systems of uncertainty where these results do not hold.)
Collusion at the Extensive
Margin
Uncertainty
Anti-Trust
UnitingFrameworks
Predatory Entry
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Predatory Entry
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Natural Monopoly Market Natural Duopoly Market
Firm 1 Firm 2Predatory Entry
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Natural Monopoly Market Natural Duopoly Market
Initial Deviation (t = 1)
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Initial Deviation (t = 1)
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Initial Deviation (t = 1)
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Gain in Period 1
Initial Deviation (t = 1)
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Gain in Period 1 Loss in Period 1
Firm 1 Firm 2Response (t = 2)
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Firm 1 Firm 2Response (t = 2)
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Firm 1 Firm 2Response (t = 2)
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Gain in Period 2
Firm 1 Firm 2Response (t = 2)
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Gain in Period 2
Loss in Period 2
Firm 1 Firm 2Response (t = 2)
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Gain in Period 2
Loss in Period 2 Loss in Period 2
(1) (2) + m (2)
Firm 1 Firm 2Return to the Equilibrium Path (t = 3)
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12
Firm 1 Firm 2Return to the Equilibrium Path (t = 3)
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Stability ConditionsIntroductionThe Model
Collusive Equilibria
Uncertainty
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Collusion at the Extensive
Margin
Anti-Trust
UnitingFrameworks
Stability ConditionsIntroductionThe Model
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Uncertainty
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Collusion at the Extensive
Margin
Anti-Trust
UnitingFrameworks
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Implications for Anti-Trust Policy IntroductionThe Model
Collusive Equilibria
Uncertainty
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Collusion at the Extensive
Margin
Anti-Trust
UnitingFrameworks
Implications for Anti-Trust Policy IntroductionThe Model
Collusive Equilibria
Uncertainty
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Participation across the set of markets may be easier to observe thana rms strategic behaviour within a market.
Collusion at the Extensive
Margin
Anti-Trust
UnitingFrameworks
Implications for Anti-Trust Policy IntroductionThe Model
Collusive Equilibria
Uncertainty
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Participation across the set of markets may be easier to observe thana rms strategic behaviour within a market.
Collusion at the extensive margin can be implemented by a smaller
group of managers than collusion at the intensive margin, helping toreduce the risk of detection.
Collusion at the Extensive
Margin
Anti-Trust
UnitingFrameworks
Implications for Anti-Trust Policy IntroductionThe Model
Collusive Equilibria
Uncertainty
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Participation across the set of markets may be easier to observe thana rms strategic behaviour within a market.
Collusion at the extensive margin can be implemented by a smaller
group of managers than collusion at the intensive margin, helping toreduce the risk of detection.
A cartel may be able to avoid prosecution by aligning the boundariesof a collusive partition with the boundaries of anti-trust authority
jurisdictions.
Collusion at the Extensive
Margin
Anti-Trust
UnitingFrameworks
Implications for Anti-Trust Policy
Introduction
The Model
Collusive Equilibria
Uncertainty
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Participation across the set of markets may be easier to observe thana rms strategic behaviour within a market.
Collusion at the extensive margin can be implemented by a smaller
group of managers than collusion at the intensive margin, helping toreduce the risk of detection.
A cartel may be able to avoid prosecution by aligning the boundariesof a collusive partition with the boundaries of anti-trust authority
jurisdictions.
The theory provides new insights into where we may nd a collusiveagreement operating.
Collusion at the Extensive
Margin
Anti-Trust
UnitingFrameworks
Management Complicity in Multi-Market Collusion
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Management Complicity in Multi-Market Collusion
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Firm Level
Vic
WA SA
Qld NT
NSW
Tas
Management Complicity in Extensive MarginCollusion
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Firm Level
WA SANSW
Management Complicity in Extensive MarginCollusion
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Firm Level
Monopoly Monopoly
WA SANSW
Management Complicity in Extensive MarginCollusion
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Firm Level
Monopoly Monopoly Competitive
WA SANSW
Management Complicity in Extensive MarginCollusion
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Firm Level
Transnational Extensive Margin Collusion
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Transnational Extensive Margin Collusion
Firm 1 Firm 2
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Firm 1 Firm 2
Firm 3
Transnational Extensive Margin Collusion
Firm 1 Firm 2
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Firm 3
ACCC
Transnational Extensive Margin Collusion
Firm 1 Firm 2
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Firm 3
ACCCCompetitionBureau
Transnational Extensive Margin Collusion
Firm 1 Firm 2
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Firm 3
ACCC
CompetitionCommission
CompetitionBureau
Transnational Extensive Margin Collusion
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Firm 1
CompetitionBureau
Transnational Extensive Margin Collusion
Firm 1 Firm 2
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Firm 3
ACCC
CompetitionCommission
CompetitionBureau
Beer or Soft Drink Market
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Beer or Soft Drink Market
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Retail Sales
Vending Machine Location B
Beer or Soft Drink Market
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Retail Sales
Restaurant Chain A
Restaurant Chain B
Restaurant Chain C
Bar A
Bar B
Sports Ground
Entertainment Venue
Vending Machine Location A
Vending Machine Location B
Vending Machine Location C
Convenience Store A
Convenience Store B
Collusive FringeFirm 1 Firm 2
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Retail Sales
Restaurant Chain A
Restaurant Chain B
Restaurant Chain C
Bar ABar B
Sports Ground
Entertainment Venue
Vending Machine Location A
Vending Machine Location B
Vending Machine Location C
Convenience Store A
Convenience Store B
Contested
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Uniting Frameworks:Collusion at the Intensive and Extensive
Margins
Relative Stability
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
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Uniting
Frameworks
Collusion at the Extensive
Margin
Relative Stability
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
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All MPEs are sub-game perfect and therefore are equilibria of theunied framework.
Uniting
Frameworks
Collusion at the Extensive
Margin
Relative Stability
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
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All MPEs are sub-game perfect and therefore are equilibria of theunied framework.
Consider a multi-market setting containing two identical, separable
and symmetric markets and suppose that two rms collude utilisinggrim strategy enforcement.
Uniting
Frameworks
Collusion at the Extensive
Margin
Relative Stability
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
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All MPEs are sub-game perfect and therefore are equilibria of theunied framework.
Consider a multi-market setting containing two identical, separable
and symmetric markets and suppose that two rms collude utilisinggrim strategy enforcement.
If the rms collude at the intensive margin of both markets they eachreceive C from each market while deviating nets a rm D.
Uniting
Frameworks
Collusion at the Extensive
Margin
Relative Stability
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
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All MPEs are sub-game perfect and therefore are equilibria of theunied framework.
Consider a multi-market setting containing two identical, separable
and symmetric markets and suppose that two rms collude utilisinggrim strategy enforcement.
If the rms collude at the intensive margin of both markets they eachreceive C from each market while deviating nets a rm D.
Uniting
Frameworks
Collusion at the Extensive
Margin
GS = (2)
(1) (2)
Relative Stability
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
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All MPEs are sub-game perfect and therefore are equilibria of theunied framework.
Consider a multi-market setting containing two identical, separable
and symmetric markets and suppose that two rms collude utilisinggrim strategy enforcement.
If the rms collude at the intensive margin of both markets they eachreceive C from each market while deviating nets a rm D.
Uniting
Frameworks
Collusion at the Extensive
Margin
GS = (2)
(1) (2) IM =
D C
D (2)
Complementarities Between Collusion at the Intensive and Extensive Margins
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
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Uniting
Frameworks
Collusion at the Extensive
Margin
Complementarities Between Collusion at the Intensive and Extensive Margins
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
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Consider a multi-market setting containing three identical, separableand symmetric markets.
Uniting
Frameworks
Collusion at the Extensive
Margin
Complementarities Between Collusion at the Intensive and Extensive Margins
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
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Consider a multi-market setting containing three identical, separableand symmetric markets.
Suppose that each rm acts as a monopolist in one market while
colluding at the intensive margin of the third market. A deviation ispunished by permanent reversion to the oligopolistically competitiveequilibrium.
Uniting
Frameworks
Collusion at the Extensive
Margin
Complementarities Between Collusion at the Intensive and Extensive Margins
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
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8/8/2019 Collusion at the Extensive Margin (Presentation)
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Consider a multi-market setting containing three identical, separableand symmetric markets.
Suppose that each rm acts as a monopolist in one market while
colluding at the intensive margin of the third market. A deviation ispunished by permanent reversion to the oligopolistically competitiveequilibrium.
A rm can either deviate in the participation or market stage but not
both. Punishments are carried out across all markets
Uniting
Frameworks
Collusion at the Extensive
Margin
Complementarities Between Collusion at the Intensive and Extensive Margins
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
-
8/8/2019 Collusion at the Extensive Margin (Presentation)
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Consider a multi-market setting containing three identical, separableand symmetric markets.
Suppose that each rm acts as a monopolist in one market while
colluding at the intensive margin of the third market. A deviation ispunished by permanent reversion to the oligopolistically competitiveequilibrium.
A rm can either deviate in the participation or market stage but not
both. Punishments are carried out across all markets
Uniting
Frameworks
Collusion at the Extensive
Margin
crit < max { GS , IM }
Length versus Breadth of Punishment
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
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Uniting
Frameworks
Collusion at the Extensive
Margin
Length versus Breadth of Punishment
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
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The temporary punishments set out in the paper persist for exactly one period.
Uniting
Frameworks
Collusion at the Extensive
Margin
Length versus Breadth of Punishment
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
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The temporary punishments set out in the paper persist for exactly one period.
The strength of each punishment can be increased by increasing thelength of the punishment.
Uniting
Frameworks
Collusion at the Extensive
Margin
Length versus Breadth of Punishment
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
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The temporary punishments set out in the paper persist for exactly one period.
The strength of each punishment can be increased by increasing thelength of the punishment.
Length and scope of punishment are substitutes.
Uniting
Frameworks
Collusion at the Extensive
Margin
Conclusion
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
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Uniting
Frameworks
Collusion at the Extensive
Margin
Conclusion
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
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We develop the rst theoretical framework in which rms may collude by coordinating market participation to avoid coming intocontact.
Uniting
Frameworks
Collusion at the Extensive
Margin
Conclusion
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
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8/8/2019 Collusion at the Extensive Margin (Presentation)
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We develop the rst theoretical framework in which rms may collude by coordinating market participation to avoid coming intocontact.
Extensive margin collusion has a number of features that may make itattractive for a cartel.
Uniting
Frameworks
Collusion at the Extensive
Margin
Conclusion
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
-
8/8/2019 Collusion at the Extensive Margin (Presentation)
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We develop the rst theoretical framework in which rms may collude by coordinating market participation to avoid coming intocontact.
Extensive margin collusion has a number of features that may make itattractive for a cartel.
We provide the rst game theoretic foundation for proportionalresponse enforcement.
Uniting
Frameworks
Collusion at the Extensive
Margin
Conclusion
Introduction
The Model
Collusive Equilibria
Uncertainty
Anti-Trust
-
8/8/2019 Collusion at the Extensive Margin (Presentation)
197/197
We develop the rst theoretical framework in which rms may collude by coordinating market participation to avoid coming intocontact.
Extensive margin collusion has a number of features that may make itattractive for a cartel.
We provide the rst game theoretic foundation for proportionalresponse enforcement.
Uniting
Frameworks