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.