Loughborough University Topic 4: Collusion - Essay Plans to all topic 4 exam questions.

Topic 4: Essay Plans

1. Describe the conditions necessary for firms to be able to create a cartel. Explain how the market
structure and industry characteristics are likely to affect a cartel’s ability to sustain a price above
the competitive level.

> Define collusion and a cartel -> Use ‘Slides 1-4’ in notes doc
- Define tacit and explicit collusion
- Collusion usually result in restricted output, higher prices and lower product innovation.
- Article 101 prohibits cartels

> Conditions necessary to create a cartel -> Use ‘Slide 5 and 7-8’
- Draw diagram with best response functions showing firms may want to collude on a price up here
so have a collective incentive to collude on this price but a unilateral (1 firm) incentive to deviate

> How market structure (characteristics: num of firms, market shares) affects a cartel’s ability to
sustain a price above the competitive level:

> Put ‘1st Model -> Collusion model based on number of firms’ point here
(State assumptions, how to get end results, what the results mean for all the models)
Result: Collusion is easier/likely to be easier to sustain (P > competitive level) when there are few
firms in the market, whereas if large number of firms in the market it is much harder to sustain.

- This result is supported by some empirical literature. For example, Hay and Kelley (1994) found
when using information on Antitrust Division price-fixing cases, that collusion was more likely to
occur when there were a small number of firms in a market. This could be because with a smaller
number of firms in the market there is a higher chance that the cartel will be successful, since firms
will be able to easily monitor each other to detect cheating. Therefore knowing this the firms enter
into a collusive agreement. -> ONLY INCLUDE IF SPARE WORDS IF NOT INCLUDE OTHER MORE
RELVEVANT POINT ON INDUSTRY CHARACTERISTICS/ MARKET STRUCTURE POINTS

- Put ‘2nd Model -> Collusion model based on market shares ’ point next
Result: Collusion easier when firms are less asymmetric (more symmetric), so collusion will occur in
markets where there are few relatively symmetric firms in the market

> How industry characteristics affects a cartel’s ability to sustain a price above the competitive
level:

Can state ‘there are many industry characteristics that affect a cartel’s ability to sustain P above the
competitive level, but I will focus on the factors product differentiation, price transparency and
multimarket contract.’

- Put ‘3rd Model -> Collusion model based on product differentiation ’ here
Result: Increased product differentiation has a uncertain effect on the sustainability of collusion
> Mention ‘Symeonidis Journal Point’

- Put ‘Price transparency’ point next
- Can relate to Denmark example
Result: The greater the price transparency the easier it is for the cartel to price above the

, competitive level

- Put ‘multimarket contact’ point next
Result: The greater the multiple markets mean the punishment can be more serve so the easier to
collude and maintain a price above the competitive level


> Conclusion:
- Underlying conditions are important in creating the cartel
- Many factors based on market structure and industry characteristics determine a cartel’s ability to
sustain price above the competitive level – number of firms, market shares, whether a firm in the
cartel has an incentive to whistle blow which depends on factors like leniency programmes, product
differentiation, price transparency, the own firms discount factor, multimarket contract etc. Some of
these factors will be more important for some industries than others.