Some questions and answers on collusion

Q : Do cross-ownership always trigger collusive behavior ?

A : No.. Not Always. Some articles shows that cross ownership indeed could trigger collusion especially in static setting (Reynold and Snapp (1986) , Farrel and Shapiro (1990)). Yet in dynamics setting, Malueg (2002) found that cross ownership could lead into non-collusive behavior due to the inability of the firms to punish any defection behavior of the firms. (Malueg, 2002).
While that, Gilo, Moshe and Spiegel (2006), using also dynamics setting, found that the collusive outcome could be found in cross ownership under certain parameter vector.

It means that theoritically, there is no conclusive results on relationship between cross ownership and collusive behavior.

Q: If we can not use theory, what are the proofs of collusive behavior in cross ownership?

A : There are two possible forms of collusion. The first one is explicit collusion and another one is the implicit collusion. The main difference between these two collusive forms is the communication strategy and side payment. In explicit collusion, there is usually any forms of communication between the cartel members. Furthermore, they also have side payment as a forms of punishment from collusive agreement. While that, in implicit collusion, they do not have any of these two main forms on interaction.
Forms of collusive behavior determine the ability of Antitrust Authority (AA) to detect collusion. Most of the revealed collusion are the explicit collusion (vitamin collusion,lysine, etc). AA used any proofs of communication such as : meeting notes etc , as the evidence of the collusion. However, in implicit collusion, these can not be used since there is no proof of communication .

Q : Thus, in implicit collusion, is there powerful tools that can be used as signal of collusion, may be price cost margin, variation of price, comovement in prices, etc ?

A : We could discuss each of possible variables :
1. Price cost margin.
Traditionally, this variable is used as the signal of collusion. Yet it is also has a major set back. Collusion certainly means high price cost margin (PCM). But not all high PCM can be get from collusion. PCM is just an evidence of maket power (not more nor less). High PCM could also be the results of eficiency in cost structure. Konings,Cayseele,Wayzynski (2005) empirically found that high price cost margin in eastern europe after privatisation could be lead by cost efficieny ( due to competitive pressure).


2. variation in price.
Traditionally, we assume that low variation in price could be a signal of collusion. Yet, this view is refuted using the found of green and porter. Green and Porter (1984), and research on Joint Executive Commitee (198?), the variation in price could also be higher in collusion.

The intuition of these result is quite clear. If we used a trigger startegy ala Friedman (1972) or stick-and-carrot ala Abreu (1985-1986), price variation is low in collusive phase. But the price variation will high during punishment phase ( it is proven in price fluctuation at Joint Executives Committe). If we combine these two phase (collusion + punishment), the price variation could be higher rather than that of in competitive era.

Moreover, Rotemberg and Saloner (1986) also found that price ( thus its variation) is also depends on the demand fluctuation. If demand is low, the variation price could be low, yet if demand is high , thus there will be a price war, the variation of price can be high. If we combine these two condition, again we get that variation prices could also be higher in collusion. Hence, it means, using low variation of price could not be just used as the signal of collusion.


These two examples tells us that there is no a general variables that can be used as the clear signal of collusive agreement

Q : If that is the case, do we have a consistent method to detect collusive act?

A : As far I am concern, there is no a general method (which is at least consistent) that can be used to detect all implicit collusion. Bajari and Ye ( 2003), Porter and Zona (1993), Banerji and Meenakshi ( 2004), Bos and Schinkel (2007) have developed some methods to theoritically and empirically detect implicit collusion. However, each method has its own set back (may be good to detect certain form of collusion but not that good to detect another forms of collusion, or the availability of data)


N.B : Congratulation for KPPU. Thank you for the effort.Despite all controversies, this decision on Tamasek , could be a bad signal to all the cartel in Indonesia. Now, they should know that we have a good AA.

Why Jakarta Keep on Flooding at Rainy Season?

It has not been raining for a while, but when it does rain for a couple of hour in Jakarta you can be sure that the street will to flood in many places.

Why can’t the government of Jakarta clean the sewer from garbage and mud before the rainy season, which comes rather predictably, so the water can flow smoothly?

Water on the street weakened the asphalt and after a repeated exposure demands a rehabilitation and outpouring of new layer of asphalt and rocks. Thus, more money from public budget need to be allocated to fix it.

Spending smaller amount of money on prevention of flood seems to be the logical action, right?

The Politics of Budgeting by Prof Rubin is a book that tries to shed light into the budgeting process in America. One insight that he offer is how the budget is a process.

If the item is a carry over from last year with approximately the same amount, then it is likely to get through easily since questioning it meaning questioning the virtue of last year appropriation and few people (especially politician) want to second guess themselves.

If one department does not finish the allocated budget and leave significant sum at the end of the year, then most likely that for the next budgeting year the department will receive less since the legislative will assume that the department can work properly with the smaller budget.

Having a larger budget meaning the head of the department have larger power and discretion (I will not discuss about corruption). The turf war is a never ending fight.

This could explain why there are many program are allocated at the end of the year (I will not discuss the probable interest gain by deferring disbursement).

Does the similar thing happen in Jakarta?

Having broken roads could mean particular department(s) in Pemda DKI will need budget allocation to fix it. Cleaning the sewer before the rainy season mean there will be less broken road. Thus, leave significant sum in the end of budget year which could resulted in less budget next year. What is good for the people of Jakarta may not be what’s best for some people.

But Napoleon once said, "Never ascribe to malice that which is adequately explained by incompetence."

Two Quotes from Wise Economists

“Economist do not know very much about the economy, other people, including the politicians who make economic policy, know even less.”

(Herbert Stein – Professor at U of Virginia and Chair of US Council of Economic Advisors to President 1969-74)

“Economists have the least influence on policy where they know the most and are most agreed; they have the most influence on policy where they know the least and disagree most vehemently.”

(Alan Blinder – Professor at Princeton and Vice Chairman of the Fed 1994-1996)

The first teach us humility, the second warn us on the danger in the lack of it.

Economics of Wedding Reception

After Iedul Fitri come piles of wedding in Jakarta. The next one just more extravagant than the others. Why do we spend so much on the one night celebration?

Is it a signaling gesture? It could be a way to tell the guests that the newlywed has good breed (parents able to finance the lavish wedding) and good connection (politician and business mogul as guest) thus credibly sending signal to current boss and potential employee to open the career path for them.

Is it a sunk cost tactic? The higher the cost of the wedding then the more reluctant the couple (and the family) to end up in divorce since all the cost involved (and photos and other memorabilia) will loose most of its value. Is there a correlation between wedding cost and duration of marriage? I admit this approach must take into account the relative value of wedding cost to (parental) wealth instead of absolute value of wedding cost.

Or is it an investment move? The more extravagant the marriage (the venue is usually a good indicator) it the more it invite the guests to put additional money in the envelope.

What do you think?

A Tribute to David F. Hendry

One of The Great Econometricians

by Dhaniel Ilyas

Sudah cukup lama, saya absen menulis di blog ini karena kesibukan dan ‘mood’ yang tidak kunjung datang. Ini adalah tulisan kedua saya pada blog Kafe Depok ini. Mungkin saja tulisan berikutnya akan berjeda selama tulisan pertama dan kedua ini (enam bulan lebih) ^_^ Mudah-mudahan tulisan yang sederhana ini dapat berkenan di hati para pembacanya. Seperti biasa topik tulisan saya terkait dengan ekonometrika. Kali ini saya ingin mengangkat tulisan mengenai David F. Hendry. Seorang Ahli Ekonometri terkenal yang mempunyai sumbangsih besar dalam perkembangan Ilmu Ekonometri.

Tulisan ini saya mulai dengan kutipan akan kata-kata Joseph A. Schumpeter, seorang ekonom besar sejaman Keynes yang ’kalah pamor’, namun tidak diragukan lagi memiliki kontribusi yang luar biasa.

”The only way to a position in which our science might give positive advice on a large scale to politicians and business men, leads through quantitative work. For as long as we are unable to put our arguments into figures, the voice of our sciences, although occasionally it may help to dispel gross errors, will never be heard by practical men. They are, by instinct, econometricians all of them, in their distrust of anything amenable to exact proof.” (Joseph A. Schumpeter, ‘The Common Sense of Econometrics’, Econometrica, 1 (1933), p.12.)

Disini terlihat salah satu cita-cita awal dari pengembangan ilmu ekonometri. Tapi pada perkembangan selanjutnya terdapat ‘kesulitan-kesulitan’ untuk membentuk ‘exact proof’ ini. Para ahli ekonometri terus menerus mencari teknik-teknik ataupun metode-metode yang dapat semakin menyempurnakan ilmu yang mereka geluti.

Pada ‘Introduction’ dalam bukunya yang berjudul “Dynamic Economics”. Hendry (1987) menawarkan empat ‘golden prescriptions’ dalam ilmu ekonometri sebagai usahanya untuk memberikan ‘arahan’ kepada para praktisi-praktisi yang menggunakan ekonometri dalam menghadapi permasalahan-permasalahan dalam pencarian model yang ‘baik’ tersebut:

1. Think Brilliantly: if you think of the right answer before modeling, then the empirical results will be optimal and, of course, confirm your brilliance. Many conventional textbooks simply assume that the model is correct – we will not do so…, although the methods proposed deliver the right results if this case happens to apply.
2. Be infinitely creative: if you do not think of the correct model before commencing, the next best is to think of it as you proceed. While no valid constructive method can be proposed, data evidence can help guide model development in a systematic manner.
3. Be outstanding lucky: if you do not think of the ‘true model’ before starting nor discover it en route, then luckily stumbling over it before completing the study is the final sufficient condition. This may be the most practical of these suggestions. Failing this last prescription:
4. Stick to doing theory!

(Catatan: Preskripsi ini tidak diterjemahkan ke dalam Bahasa Indonesia untuk memperoleh pemahaman yang lebih optimal dari pemikirannya)

Kurang lebih Hendry mengatakan kepada para ekonom-ekonom yang menggunakan ekonometri untuk berusaha brilian dan kreatif. Ini adalah hal yang saya rasa diperlukan untuk membentuk apapun agar menjadi ‘baik’ dan ‘optimal’. Namun preskripsi yang ketiga cukup mengejutkan saya: Anda harus termasuk orang-orang yang mempunyai peruntungan yang tinggi! Lalu, jika semuanya tidak berhasil, jangan keluar dari teori! Jika teori (ekonometri) yang ada pun tak mampu menghasilkan model yang memuaskan, bagaimana?

Apakah seorang ekonometrisian yang handal harus memiliki peruntungan yang tinggi? Bagaimana jika kita adalah seseorang yang lebih mendekati kepada peruntungannya ‘Donald Bebek dibanding rivalnya si ‘Untung’? ^_^

Ternyata Hendry tidak berhenti sampai disitu… Kurang lebih hampir satu dekade setelah itu dia mengatakan:

“These sufficient conditions are tantamount to the assumption of omniscience of the modeler and we cannot rely on their sustaining a viable methodology. Fortunately, these prescriptions are not necessary… That no realistic sufficient conditions can be established which ensure the discovery of a ‘good’ empirical model, nor are any required for empirical econometrics to progress. However, there are a number of necessary conditions which can rule out many poor models, allowing us to focus on the best remaining candidates.” (Dynamic Econometrics, 1995)

Kita perlu hati-hati dalam menginterpretasikan dan membahasakan ‘exact proof’ yang dicita-citakan Schumpeter di awal perkembangan ilmu ekonometri. Kita memerlukan para ekonom yang mempunyai ‘seni tinggi’ dalam mempresentasikan ‘pendapat-pendapat’-nya yang didasarkan oleh ‘bukti-bukti empiris’ sebagai ‘the best remaining candidates’ yang ada.

Tulisan yang luar biasa menurut saya dari seorang ahli ekonometri besar. Saya amat menghormati ilmuwan-ilmuwan yang terus menjaga ‘kegelisahan’-nya akan ‘pencarian kebenaran’, bukan alih-alih terus mempertahankan ‘kepercayaan-kepercayaannya’. Salah satu contoh klasik adalah Gunnar Myrdal, yang meragukan pemikiran-pemikiran awalnya di masa-masa akhir kehidupannya. Juga Alfred Marshall dalam surat-suratnya. (Hubungi saya jika tertarik mengetahui hal ini.) Seringkali para ekonom hanya membetik satu pemikiran pada satu fase kehidupan para pemikir besar ini untuk mendukung pendapat mereka tanpa berusaha memahami kompleksitas dari proses pemikiran mereka. Saya selalu berusaha memahami para pemikir-pemikir tersebut terkait dengan konteks kerumitannya sesuai dengan ‘proses’ yang mereka jalani dan berusaha menggunakan semua ‘cahaya-cahaya pemikiran’ mereka untuk menyelesaikan ‘permasalahan riil’ yang ada, bukan menjadi pengikut-pengikut salah satu dari mereka dengan ‘buta’.

Mereka adalah orang-orang yang rendah hati akan ‘cahaya kebenaran’

Catatan: Tulisan sederhana ini dibuat penulis akan penghormatannya kepada David F. Henry. Seorang ahli ekonometri besar yang terus menjaga ’kegelisahan’-nya. Sang ekonometrisian yang terus ’mencari’ tanpa henti dalam mengarungi lautan ilmu ekonometri. Sebagian besar isi tulisan ini didasarkan akan bukunya yang berjudul ”Dynamic Econometrics”.