Regulation and Antitrust Collusion and horizontal agreements Christine Zulehner Department of Economics Johannes Kepler University Linz Summer term 2011 Zulehner, Regulation and Antitrust 1 / 63 Motivation Adam Smith (1776) already noticed that people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in same contrivance to raise prices .... Illustration: newspaper industry in Detroit in 1989, Detroit Free Press and Detroit News were allowed to merge although they formed a monopoly as Free Press was about to fail the two papers further appeared as two entities, but the ﬁrm merged on all other aspects like cost, setting rates, advertising and so on. ﬁrm acted as a monopoly and we observed a change in proﬁts: each lost about 10 Mill. a year, afterwards proﬁts were high as 150 Mill Zulehner, Regulation and Antitrust 2 / 63 Incentive to collude Linear demand: p = a − b ∗ q and constant marginal cost: MC = c Monopoly maximize: π = (p − c) ∗ q = (a − bq − c) ∗ q a−c FOC: dπ dq = a − 2b ∗ q − c = 0 → q = 2b and p = πM = a+c 2 (a−c)2 4b Cartel of two ﬁrms i = 1, 2: πiCartel = (a−c)2 8b Cournot competition among two ﬁrms i = 1, 2 maximize π1 = (a − b ∗ (qi − q2 ) − c) ∗ q1 1 FOC: dπ dq = a − 2b ∗ q1 − b ∗ q2 − c = 0 a−c 3b = q2 , (a−c)2 Cournot π = i 9b → q1 = q= 2(a−c) 3b and p = a+2c 3 Price competition among two ﬁrms i = 1, 2: πiBertrand = 0 Zulehner, Regulation and Antitrust 3 / 63 Outline Collusion and cartels Collusion theory Factors that facilitate collusion Policies against collusion Calculation of cartel damages Literature chapter 4 in Motta (2004): Competition policy: Theory and practice chapter 7 in Davis and Garces (2010): Quantitative techniques for competition and antitrust analysis Zulehner, Regulation and Antitrust 4 / 63 Collusion and cartels What is collusion? since total industry proﬁts in oligopoly are always lower than monopoly proﬁts, ﬁrms will attempt to establish agreements among each other to eliminate competition What is a cartel? institutional form of collusion attempt to enforce market discipline and reduce competition between a group of suppliers cartel members agree to coordinate their actions (prices ﬁxing, quotas, consumer allocation, bid rigging) prevent excessive competition between the cartel members secret agreements, because cartels illegal in the US and EU Tacit collusion: mutual understanding without explicit agreement Zulehner, Regulation and Antitrust 5 / 63 Incentives to cheat Main problem with cartel agreements as well as tacit collusion temptation to cheat on competitors if all other ﬁrms stick to the agreement, you can increase proﬁts by deviating and stealing your rivals’ business (undercutting, violating territories, etc) comparable to a Prisoner’s dilemma To sustain collusion, cartel must be able to detect deviators: can you give an answer to a question like “Have prices decreased as someone deviated or as demand decreased?” punish the deviator(s): which strategies are possible? Zulehner, Regulation and Antitrust 6 / 63 The diamond cartel De Beers established in South Africa in 1888 by Cecil Rhodes owned all diamond mines in South Africa had joint ventures in Namibia, Botswana, Tanzania controlled diamond trade (mines → cutters and polishers) through “Central Selling Organization” (CSO), processing about 80% of world trade CSO’s services for the industry expertise in classifying diamonds stabilizing prices (through stocks of diamonds) advertising diamonds Zulehner, Regulation and Antitrust 7 / 63 The diamond cartel cont’d Huge temptation for mining companies to bypass CSO and earn high margins themselves In 1981, President Mobutu announced that Zaire (world’s largest supplier of industrial diamonds) would no longer sell diamonds through the CSO Two months later, about 1 million carats of industrial diamonds ﬂooded the market, price fell from $3 to less than $1.80 per carat Supply of these diamonds unknown, but very likely retaliation by De Beers In 1983, Zaire renewed contract with De Beers, at less (!) favorable terms than before Zulehner, Regulation and Antitrust 8 / 63 The law Cartel laws make cartels nowadays illegal in the US and Europe US: jail sentences (DRAM cartel) exception in the US: export cartels exception in Austria: “Bagatellkartelle” Cartels have always been with us and still are Some are explicit and diﬃcult to prevent (OPEC) Other less explicit attempts to control competition Authorities continually search for cartels improving methods detecting cartels like price screening leniency programs have been successful in recent years (nearly $1 billion in ﬁnes in 1999) Zulehner, Regulation and Antitrust 9 / 63 The vitamin cartel EC has found that 13 European and non-European companies participated in cartels aimed at eliminating competition in the vitamin A, E, B1, B2, B5, B6, C, D3, Biotin (H), Folic Acid (M), Beta Carotene and carotinoid markets. A striking feature of this complex of infringements was the central role played by Hoﬀmann-La Roche and BASF, the two main vitamin producers, in virtually each and every cartel, whilst other players were involved in only a limited number of vitamin products → severity of punishment Firm Country Hoﬀman-La Roche AG BASF AG Aventis SA Solvay Pharmaceuticals Merck KgaA Daiichi Pharmaceuticals Co Ltd Eisai Co Ltd Takeda Chemical Industries Ltd Switzerland Germany France Netherlands Germany Japan Japan Japan Zulehner, Regulation and Antitrust Fines in mill A C 462.00 296.00 5.04 9.10 9.24 23.40 13.23 37.05 10 / 63 Collusion theory Noncooperative collusion in a static model vs. repeated games dominant ﬁrm model dynamic strategies Factors that facilitate collusion market structure price transparency and exchange of information pricing rules (facilitating practices) Further reading imperfect information and non-cooperative collusion (Greene and Porter 1984) price wars during booms (Rotemberger and Saloner 1986) impact of cyclical demand movements on collusive behavior (Haltiwanger and Harrington 1986) collusion with capacity constraints (Fabra 2006) Zulehner, Regulation and Antitrust 11 / 63 Noncooperative collusion in a static model N ﬁrms produce a homogenous product let the inverse demand function be linear N p = a − bQ with Q = i =1 qi constant average and marginal cost c(qi ) = c F of the N ﬁrms form the fringe each ﬁrm in the fringe acts as a Cournot quantity setting oligopolist it maximizes its own proﬁt taking the the output of the other ﬁrms as given the remaining K ﬁrms restrict output and maximize joint proﬁts taking the behavior of the fringe into account Zulehner, Regulation and Antitrust 12 / 63 Noncooperative collusion in a static model proﬁt maximization maxπj = pqj − cqj = (a − bQ)qj − cqj ∂π FOC: ∂qjj = (a − bQ) − bqj − cqj = 0 → 2bqj = a − c − bQK − bQF −j each fringe ﬁrm selects output along a best-response curve qj = 12 (S − QK − bQF −j ) K with S = a−c k=1 qk the output of the restrictive group b and QK = QF −j is the combined output of all fringe ﬁrms except ﬁrm j in equilibrium all fringe ﬁrms produce the same output QF −j = (F − 1)qj qj = 12 (S − QK − bQF −j ) S−QK K qj = S−Q F −1 and QF = F F +1 Zulehner, Regulation and Antitrust 13 / 63 Noncooperative collusion in a static model residual demand function the restrictive group is facing p = a − b(QK − QF ) b p = c + F +1 (S − QK ) proﬁt maximization maxπk = pqk − cqk given residual demand, the proﬁt maximizing per ﬁrm and total output are qk = 1 1 K 2S and QK = 12 S the output restricting group acts as Stackelberg leader qf = 1 1 F +1 2 S and p = c + 1 1 F +1 2 bS proﬁts per ﬁrm of ﬁrms inside and outside the restrictive group πk (F , K ) = b 1 K (F +1) 2 S Zulehner, Regulation and Antitrust and πf (F ) = b 1 2 (F +1)2 ( 2 S) 14 / 63 Noncooperative collusion in a static model questions: is this a stable situation? is there an incentive to deviate? assume ﬁrst, all ﬁrms restrict output such a situation is stable if πk (0, N) ≥ πf (1) → N ≤ 4 if there are four or less than four ﬁrms then output restriction is stable; if there are more than four ﬁrms that restrict output, each ﬁrms share of the monopoly proﬁt is too small; each ﬁrms should defect and act as an independent Cournot ﬁrm Zulehner, Regulation and Antitrust 15 / 63 Noncooperative collusion in a static model if the number of fringe ﬁrms is positive, the conditions for internal and external stability can be rewritten as F +1+ 1 F ≤K ≤F +3+ 1 F +1 necessary and suﬃcient condition for internal stability: no restricting ﬁrm wants to deviate necessary and suﬃcient condition for external stability: no fringe ﬁrm wants to deviate enough ﬁrms in the fringe so that fringe proﬁts are not too great and output restricting ﬁrms have no incentive to join the fringe enough ﬁrms restricting output so that fringe ﬁrms do not want to join the output restricting ﬁrms since F and K are integers, this implies that if there are F ﬁrms in the fringe, output restriction is stable only if output restriction is by groups of F + 2 or F + 3 ﬁrms Zulehner, Regulation and Antitrust 16 / 63 Noncooperative collusion in repeated games static models omit an essential element of the cost of defecting from an output restricting equilibrium proﬁt lost once rivals realize that the agreement is being violated when ﬁrms deviate, the equilibrium output of all ﬁrms increases other ﬁrms observe that and react by also deviating and producing more output whether output restriction is stable in a dynamic sense depends on a single ﬁrm’s present value of short-term gains from output expansion ﬁrms compare future discounted proﬁts to short-run gains due to deviation such a trade-oﬀ cannot be analyzed in a static game Zulehner, Regulation and Antitrust 17 / 63 Cartel stability in general, cartels are unstable can we ﬁnd mechanisms that give stable cartels? violence is one possibility! suppose that the ﬁrms interact over time make cheating unproﬁtable: reward “good” behavior, punish “bad” behavior ingredients necessary to enforce collusion timely detection of deviations from collusive actions credible mechanism for the punishment of deviations threat of punishment prevents ﬁrms from deviating Zulehner, Regulation and Antitrust 18 / 63 Incentive to deviate Cournot with two ﬁrms i = 1, 2 linear demand p = a − b ∗ (q1 + q2 ) and constant marginal cost c maximize π1 = (a − b ∗ (q1 − q2 ) − c) ∗ q1 1 FOC: dπ dq1 = a − 2b ∗ q1 − b ∗ q2 − c = 0 a+2c → q1 = a−c 3b = q2 and p = 3 proﬁts: π1 = (a−c)2 9b = π2 ﬁrm 1 sticks to the collusive agreement and ﬁrm 2 deviates by playing a best response proﬁts of ﬁrm 1: π1collude = proﬁts of ﬁrm 2: π2deviate = Zulehner, Regulation and Antitrust 3(a−c)2 8∗4b 9(a−c)2 8∗8b > π1collude 19 / 63 Repeated games formalizing these ideas leads to repeated games a ﬁrm’s strategy is conditional on previous strategies played by the ﬁrm and its rivals proﬁts from cheating are taken into account repeated games can become very complex strategies are needed for every possible history but some “rules of the game” reduce this complexity Nash equilibrium reduces the strategy space considerably Zulehner, Regulation and Antitrust 20 / 63 Finite vs. inﬁnite games number of periods played is known and ﬁnite credibility of punishment strategies and possibility of cooperation disappears backward induction Selten theorem: if a game with a unique Nash equilibrium is played ﬁnitely many times, its solution is that Nash equilibrium played every time suppose the cartel expects to last indeﬁnitely equivalent to assuming that the last period is unknown every period there is a ﬁnite probability that competition will continue now there is no deﬁnite end period so it is possible that the cartel can be sustained indeﬁnitely Zulehner, Regulation and Antitrust 21 / 63 Noncooperative collusion in a repeated game Intuition: cartels solve the cheating problem by threatening to punish deviators in the future homogenous good duopoly constant symmetric MC in each period t = 1, 2, 3, . . . , ﬁrms simultaneously set prices “repeated Bertrand game” Equilibrium? One possibility Bertrand equilibrium (i.e. p1 = p2 = MC) in each period t = 1, 2, 3, . . . Zulehner, Regulation and Antitrust 22 / 63 Noncooperative collusion in a repeated game cont’d Another possibility collusive equilibrium (p > MC) Suppose ﬁrms play “grim trigger strategies”: in the ﬁrst period, both ﬁrms set pM (monopoly price), and share proﬁts πM equally. in any of the following periods: ﬁrm sets pM if both ﬁrms set pM in each preceding period if instead one of the ﬁrms violated the collusive agreement (price below pM in previous period), then both ﬁrms set p = MC forever (“punishment” or “retaliation”) Is this enough to keep ﬁrms from cheating? Zulehner, Regulation and Antitrust 23 / 63 Noncooperative collusion in a repeated game cont’d If both ﬁrms stick to the collusive agreement, each has expected discounted proﬁts as 1 0.5πM + 0.5δπM + 0.5δ 2 πM + . . . = 0.5πM 1−δ where δ < 1 is the discount factor If ﬁrm 1 deviates today: undercut ﬁrm 2, make proﬁts πM today from tomorrow onwards, p = MC, and so π = 0 → Is collusion better than deviation? 1 incentive constraint: 0.5πM 1−δ ≥ πM + 0 ∗ which holds whenever δ ≥ δ = 0.5 with δ ∗ the critical discount factor Zulehner, Regulation and Antitrust 24 / 63 State games assume there is a sequence of discrete time points at each point in time ﬁrms play a static game repeated game example: Cournot a strategy vector s ∗ ∈ S = (S1 , . . . , Sn ), the strategy set, is a noncooperative equilibrium if each element of s ∗ maximizes the corresponding player’s payoﬀ taking other elements of s ∗ as given πi (s ∗ ) = maxsi ∈Si πi (s1∗ , . . . , si∗−1 , si , si∗+1 , . . . , sn∗ ), i = 1, . . . , n Friedman (1971) proofed the existence of an equilibrium Zulehner, Regulation and Antitrust 25 / 63 Strategies in a state game how does the ﬁrm react when, for example, another ﬁrm deviates from a cartel behavior strategies describe behavior of the ﬁrm example: trigger strategies let sncc be the strategy of the noncooperative collusion, i.e. ﬁrms restrict their output let snash be the strategy that gives the Nash outcome, in our example: Cournot a trigger strategy is then 1: each player begins by playing his or her part of sncc and continues to do as long as all other players do the same 2: revert to snash in the period following any defection from sncc and continue to play snash forever Zulehner, Regulation and Antitrust 26 / 63 Proﬁts in each period and future discounted proﬁts πi ,nash < πi ,ncc < πi ,defect such a condition holds, if the static game is Cournot, the demand function is linear, marginal cost is constant and the same for all ﬁrms and the sncc strategy means that each ﬁrm produces noncooperative collusive output PDVi ,ncc = απi ,ncc + α2 πi ,ncc + . . . = 1 n of the α 1−α πi ,ncc with α the discount factor PDVi ,defect = απi ,defect + α2 πi ,nash + . . . = απi ,defect + α2 1−α πi ,nash compare discounted proﬁts from the period of defection onwards wlog we assume that this is the ﬁrst period Zulehner, Regulation and Antitrust 27 / 63 Equilibrium for a trigger strategy to be a noncooperative equilibrium, the payoﬀ function adhering to the trigger strategy must be at least as great as the payoﬀ from defection, i.e. PDVi ,ncc ≥ PDVi ,defect PDVi ,ncc ≥ PDVi ,defect if α ≥ or using α = 1 1+r if 1 r ≥ πi ,defect −πi ,ncc πi ,defect −πi ,nash πi ,defect −πi ,ncc πi ,defect −πi ,nash this is always fulﬁlled, if r is suﬃciently close to zero or, α is suﬃciently close to one, i.e. the future has the same importance as the presence if α is large enough, collusion can be sustained Zulehner, Regulation and Antitrust 28 / 63 Equilibrium one can also show that the equilibrium is subgame perfect the result is that the trigger strategy sustains output paths that allow each player to earn more than with Cournot output example of Folk Theorem states that noncooperative behavior can sustain any strategy producing individual proﬁts larger than Nash proﬁts, if r is suﬃciently small Zulehner, Regulation and Antitrust 29 / 63 Other strategies trigger strategy: severe threat as usual - people forget or they do not want to be that harsh others know that, thus to stick to the Nash after defection might not be credible we search for strategies that are less grimm than trigger strategies stick and carrot tit for tat Zulehner, Regulation and Antitrust 30 / 63 Coordination on the collusive price Which collusive price? → problem of coordination tacit collusion: costly experimentation to coordinate on a collusive outcome, risk of triggering price wars explicit collusion: ﬁrms coordinate on collusive outcome and avoid problems due to shock adjustments market sharing schemes: possible to adjust to cost and demand shocks without triggering price wars ﬁrms will try to talk in order to coordinate! Zulehner, Regulation and Antitrust 31 / 63 Factors that facilitate collusion Market structure Price transparency and exchange of information Pricing rules (facilitating practices) Zulehner, Regulation and Antitrust 32 / 63 Market structure Concentration: collusion is normally easier to maintain among few (and similar) ﬁrms πM n (1 + δ + δ 2 + . . .) = δ > 1 − n1 πM 1 n 1−δ ≥ πM + 0 Entry: if entry barriers are high, collusion is easier to sustain Cross-ownership: reduces incentives to cheat, hence facilitates collusion Regularity and frequency of orders: allow for easy detection and timely punishment, hence facilitate collusion Buyer Power: strong buyers can play oﬀ rivals against each other → discourages collusion Zulehner, Regulation and Antitrust 33 / 63 Market structure cont’d Random shocks to demand: make it harder to detect deviation → discourage collusion Steady demand growth: makes punishment more eﬀective → facilitates collusion Product homogeneity: has ambiguous eﬀect on collusion Symmetry: more equal distribution of assets facilitates collusion Multi-market contacts: allow ﬁrms to leverage punishment into other markets, hence facilitating collusion Inventories and excess capacity: have ambiguous eﬀect on collusion Zulehner, Regulation and Antitrust 34 / 63 Price transparency and exchange of information observability of ﬁrms’ actions facilitate enforcement when prices are unobservable and demand is subject to shocks: deviation is diﬃcult to identify → collusion more diﬃcult (possibly involving temporary “price wars”) information exchange of past/present prices and quantities: detailed info likely pro-collusive frequency auctions: simultaneous ascending auctions code for a certain region = 02, then ﬁrms used a price like 1002 to indicate their interest in this region in Germany the auction design requested 10% increases when rasing bids: Mannesmann signaled to share the market by bidding 18.8 mill DM on blocks 1-5 and 20.0 mill DM on blocks 6-10 → why diﬀerent bids for equal products? as an answer, managers of T-Mobil increased to 20.0 DM on the blocks 1-5 Zulehner, Regulation and Antitrust 35 / 63 Price transparency and exchange of information cont’d public announcements Telekom Austria cited in the newspapers: “it would be satisﬁed with 2 out of the 12 blocks of frequencies on oﬀer”, but “it would bid for a 3rd block if one of its rivals did” “collusive price” is often ambiguous (may need to be adjusted from time to time) → exchange of information on future prices/quantities Zulehner, Regulation and Antitrust 36 / 63 Pricing rules (facilitating practices) Most favored nation (or most favored costumer) clause engages a seller to apply to a buyer the same conditions oﬀered (by the same seller) to other buyers engagement to not price discriminate → make it costly to give price discount collusion: harder to deviate and costly to carry punishment Meeting-competition clauses if the buyer gets a better price from another seller, the current seller would match the price clause works as an information device and reduces incentive to deviate Resale price maintenance vertical price agreement → vertical restraints and vertical mergers Zulehner, Regulation and Antitrust 37 / 63 Practice: What should be legal and what illegal? Standards of proof: market data vs. hard evidence Ex-ante Competition policies against collusion Ex-post Competition policies against collusion Zulehner, Regulation and Antitrust 38 / 63 Standards of proof: market data vs. hard evidence Inferring collusion from data price levels: what is a high prices? estimation price-cost margins without cost data evolution of prices: price parallelism is not a proof of collusion (common shocks) conclusion: econometric tests as complementary evidence, not proof of collusion (results sensitive to diﬀerent techniques used) Hard evidence communication on prices or coordination on facilitating practices focus on observable elements veriﬁable in courts, to preserve legal certainty: fax, e-mail, phone calls, video etc. Zulehner, Regulation and Antitrust 39 / 63 Ex-ante competition policies against collusion avoid formation of cartels deterrence of collusion: close monitoring and high ﬁnes, possibly prison sentences for managers (like US) black list of facilitating practices might deter collusion and free resources for cartel detection private announcements of future prices/outputs exchange of disaggregate current/past information good auction design to avoid bid-rigging merger control (joint dominance) Zulehner, Regulation and Antitrust 40 / 63 Ex-post competition policies against collusion surprise inspections (“Dawn Raids”) to ﬁnd hard evidence of collusion leniency programmes introduced in the US in 1978 (reformed in 1993), in EU in 1996 Zulehner, Regulation and Antitrust 41 / 63 Calculation of cartel damages Main eﬀects of a price ﬁxing cartel Methods to calculate “but for” prices Pass on defense Zulehner, Regulation and Antitrust 42 / 63 Main eﬀects of a price ﬁxing cartel cartel overcharge harm: eﬀect of higher prices on actual consumers lost volume eﬀect: eﬀect of higher prices on lost consumers/loss of volume to actual consumers Zulehner, Regulation and Antitrust 43 / 63 How are proﬁts of consumers aﬀected? decomposition of proﬁts of purchasing ﬁrm π = (p − c)q Δπ = −qΔc + qΔp + (p − c)Δq direct cost eﬀect: overcharge times number of purchased quantity pass on: depends on the extent to which the price increase caused by the cartel is passed along the supply chain output eﬀect: reduced proﬁts as a lower quantity is sold Zulehner, Regulation and Antitrust 44 / 63 Distribution of cartel overcharges in 93% of the cases, overcharge in % of the cartel price is above zero small but signiﬁcant proportion of cartels with no overcharge Zulehner, Regulation and Antitrust 45 / 63 Involved parties Zulehner, Regulation and Antitrust 46 / 63 Dynamic eﬀects market structure and market functioning reduction in rivalry between ﬁrms can result in lower levels of innovation slowing down in the rate at which improvements in eﬃciency are achieved ineﬃcient ﬁrms do not leave market distortions in the downstream markets due to higher input costs consequences for example, the counterfactual price may have been even lower (and hence the overcharge even higher) if the market had seen cost-reducing innovations in the absence of the cartel however, it may be diﬃcult to demonstrate a causal link between the infringement and the alleged longer-term harm Zulehner, Regulation and Antitrust 47 / 63 Calculate the damages calculation of the price-overcharge “rectangle” period of time during which the conspiracy had an eﬀect on prices prices at which the conspirators sold their output “but for” prices that would have prevailed in the market in the absence of the conspiracy also relevant: prices of (non-conspiring) competitors of the conspirators, who might adjust their prices in the light of the conspirators’ prices should include the “but for” prices of the non-conspiring competitors the quantities sold by the conspirators during the period of the conspiracy the quantities sold by the non-conspiring competitors calculation of the deadweight welfare loss “triangle” needs one further piece of information price-elasticity of demand for the product Zulehner, Regulation and Antitrust 48 / 63 Methods to calculate “but for” prices comparator based methods and models before and after, yardstick comparison of means, time series models, diﬀerence-in-diﬀerence determinants of prices, forecasting ﬁnancial analysis based methods and models cost based analysis market structure based methods and models theoretical/structural models static vs. dynamic models Zulehner, Regulation and Antitrust 49 / 63 Before and after comparison of data on companies (or markets) involved in the antitrust infringement in a particular period with data on the same companies (or markets) in a period without the violation comparisons before and during; during and after; before, during and after pre-infringement data is not contaminated by the cartel time after the cartel is obviously most recent, but the unwinding of the cartel is perhaps not over we would like to measure deviations from the long-run equilibrium path appropriate when cartel period is rather short and the cartel does not induce a change in the long-run equilibrium path example: Grazer Fahrschulen Zulehner, Regulation and Antitrust 50 / 63 Time series comparison Zulehner, Regulation and Antitrust 51 / 63 Yardstick cross-sectional comparator-based approach similar markets with and without a cartel are compared appropriate with local markets however, where there is a risk that these comparable markets may also have been cartelized, other methods should be considered in combination with time series data: diﬀerence-in-diﬀerence example: Lombard cartel Zulehner, Regulation and Antitrust 52 / 63 Comparison of means or regression analysis a comparison of means across regions or ﬁrms is applicable if there is a treatment eﬀect treated and non-treated are otherwise the same, but for the treatment, i.e., the cartel regression analysis can account for diﬀerences in observables regions are not the similar, but diﬀer in observable demand characteristics like population density Yi = α + βXi + δDi + i similar considerations for ﬁrms Zulehner, Regulation and Antitrust 53 / 63 Comparison of means or regression analysis comparison over time ARIMA models: price data is forecasted using only past observations of price cointegration and VEC models: it is possible to account for demand and supply and other observables diﬀerence-in-diﬀerence infringement vs. non-infringement market in addition to period before and during infringement variations across ﬁrms and time are exploited damage estimate = (period during)i - (period before)i minus (period during)ni - (period before)ni Zulehner, Regulation and Antitrust 54 / 63 Regression analysis: determinants of prices Dummy variable approach price = f(cartel, determinants like product characteristics) data for diﬀerent time periods or diﬀerent regions for the estimations all data is used Residual approach price = f(determinants) diﬀerent time periods or diﬀerent regions for the estimations data of non-cartel regime is used and predicted for the cartel regime implicit assumption: coeﬃcients of the determinants are constant over periods or regions hedonic pricing: coeﬃcients capture demand and supply factors Zulehner, Regulation and Antitrust 55 / 63 Bid-rigging in procurement auctions procurement auctions: lowest bid wins mechanism to collude division of the market inﬂated bids side payments in any case, the expected winning bid will be higher Porter and Zona (1999) research question: how can we detect cartels? application: detecting cartels in the Ohio school milk market econometric approach compare markets with collusion with control group: same time, diﬀerent regions in which districts do ﬁrms submit bids? how high are the submitted bids? Zulehner, Regulation and Antitrust 56 / 63 Cost based approaches average cost + competitive proﬁt margin estimation of competitive price based on past margins cost: balance sheet data proﬁt margin: recover cost of capital to invest in the ﬁrm, includes risk more applicable when parties involved are companies as opposed to individual consumers Zulehner, Regulation and Antitrust 57 / 63 Market structure based based on an IO model the “but for” price is simulated estimation of marginal cost, demand elasticity using data on prices and quantities various static oligopoly models Bertrand competition Cournot competition Stackelberg model Dominant ﬁrm model dynamic considerations output decisions of today inﬂuence a ﬁrm’s cost structure in the future by learning eﬀects entry and exit in the industry Zulehner, Regulation and Antitrust 58 / 63 Cournot model: competition in quantities there are i = 1, . . . , n ﬁrms that maximize their proﬁts πi πi = p(q)qi − cqi FOC: ∂p(q) ∂q qi Lerner index: + p(q) − c = 0 p(q)−c p(q) = si μ with si = qi q and 1 μ = − ∂p(q)/p(q) ∂q/q cartel overcharge factual is a cartel, i.e., a monopoly with ﬁrms maximizing joint proﬁts: m = p(q)−c p(q) counterfactual is an oligopoly with N ﬁrms: m(N − 1)/(N + 1) the lost-volume eﬀect triangle as a proportion of the overcharge rectangle is equal to (N − 1)/2(N + 1) Zulehner, Regulation and Antitrust 59 / 63 Relation b/w number of ﬁrms and lost volume eﬀect Zulehner, Regulation and Antitrust 60 / 63 Structural approach Lerner index: p(q)−c p(q) = si μ with si = qi q and 1 μ = − ∂p(q)/p(q) ∂q/q rewrite: μ p(q)−c p(q) = λ (elasticity adjusted Lerner index) λ = 0 for perfect competition λ = n1 for Cournot λ = 1 for a cartel estimation of marginal cost c using price and quantity data inverse merger simulation that could also take changes in marginal cost into account if we also estimate λ, then we already now the extend of the cartel Zulehner, Regulation and Antitrust 61 / 63 Moving from the factual/counterfactual to a ﬁnal value time period of the damage compared to the time period of the estimations summation of losses over time, if the damages claim stretches over multiple years uprating and/or discounting cash ﬂows to take into account the logic of time value of money interest from the time the damage occurred until the capital sum awarded is actually paid consider taxes Zulehner, Regulation and Antitrust 62 / 63 Pass-on defense under which circumstances is it plausible that the overcharge was passed on to end-consumers determinants a distinction must be made between ﬁrm-speciﬁc and industry-wide cost increases what is the competitive environment extend of pass-on low pass-on: ﬁrm-speciﬁc cost increase, i.e., only the defendant is concerned, and high degree of competition high pass-on: under perfect competition, an overcharge that aﬀects all competitors in a downstream market (industry-wide) would be passed on in full medium pass-on: high concentration and industry-wide cost increases Zulehner, Regulation and Antitrust 63 / 63