Price collusion: Insights into its sustainability and prosecution.

Coordinated price fixing among firms in an industry remains one of the few practices which is per se illegal under the Sherman Antitrust Act of 1890. Since the behavior is illegal, the identification of price fixing presents tremendous difficulties for antitrust authorities. For this reason, policy makers rely upon factors which facilitate collusive practices to prosecute offenders. This dissertation presents three discussions on price collusion. Chapter 2 provides three main contributions to the literature on price collusion. First, it shows that analyses relying on grim trigger strategies typically give very different predictions from approaches relying on optimal punishments. Furthermore, it shows that the class of symmetric optimal punishment equilibria qualitatively captures the results of fully optimal punishment equilibria, but that the order of magnitude of effects is systematically distorted in the case of asymmetric problems. Third, the paper generalizes and corrects previous work on collusion under product differentiation and derives new results for collusion with cross-ownership. Chapter 3 of this dissertation implements Hotelling's model of location choice (1929) when ex post price collusion is expected. Previous implementation of this model primarily predicts an equilibrium choice of homogeneity by firms. The chapter addresses the economic incentives for firms to choose homogeneity when a slight separation of firms will both ease collusion and increase maximal industry profits. The desire for a firm to homogenize is found to be driven by two effects. First, homogenizing improves the firm's outside option from failed bargaining relative to its rival. Second, relocation toward one's rival tightens the incentive constraints on collusion asymmetrically in favor of the relocating firm. Chapter 4 analyzes the effects of using market data to identify underlying industry conduct when evidence of communication between firms is not present. A conviction rule based on market prices, coupled with imperfect observability of cost structures, threatens competitive firms with wrongful conviction, resulting in inefficient production in competitive markets. Results indicate that a policy based solely on communication can be fully effective in deterring explicit collusion. However, if fines are constrained, incorporating price/cost data to improve collusion deterrence introduces welfare tradeoffs which must be carefully contrasted. While the incorporation of market data will lower the equilibrium collusive price and increase identification power, the policy will also increase competitive prices and induce the shut down of firms facing high cost realizations. The net welfare effects remain ambiguous.PhDCommerce-BusinessEconomic theorySocial SciencesUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/125742/2/3208539.pd