Section 7 Collusion and Cartels .


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Section 7 Conspiracy and Cartels. Agreement and Cartels. What is a cartel? endeavor to uphold market train and lessen rivalry between a gathering of suppliers cartel individuals consent to organize their activities costs pieces of the overall industry elite regions
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Section 7 Collusion and Cartels Industrial Organization: Chapter 7

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Collusion and Cartels What is a cartel? endeavor to implement advertise train and decrease rivalry between a gathering of providers cartel individuals consent to facilitate their activities costs pieces of the overall industry selective regions anticipate unnecessary rivalry between the cartel individuals Industrial Organization: Chapter 7

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Collusion and Cartels have dependably been with us electrical trick of the 1950s refuse transfer in New York Archer, Daniels, Midland the vitamin scheme Some are unequivocal and hard to forestall OPEC De Beers shipping meetings Industrial Organization: Chapter 7

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Collusion and Cartels Other less express endeavors to control rivalry arrangement of maker affiliations distribution of value sheets peer weight (NASDAQ?) brutality Cartel laws make cartels unlawful in the US and Europe Authorities persistently look for cartels Have been fruitful as of late Nearly $1 billion in fines in 1999 Industrial Organization: Chapter 7

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Collusion and Cartels What compels cartel development? they are by and large unlawful in essence infringement of against trust law in US generous punishments if indicted can\'t be implemented by lawfully restricting contracts the cartel must be incognito upheld by non-legitimately restricting dangers or self-intrigue cartels have a tendency to be insecure there is a motivation to undermine the cartel assention MC > MR for every part cartel individuals have the motivator to build yield OPEC until as of late Industrial Organization: Chapter 7

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The Incentive to Collude Is there a genuine impetus to have a place with a cartel? Is conning so endemic that cartels come up short? Provided that this is true, why stress over cartels? Basic reason without cartel laws lawfully enforceable contracts could be composed via cartel individuals De Beers is implicitly bolstered by the South African government offers drive to the dangers that bolster this cartel not to supply any organization that goes astray from the cartel Without contracts the enticement to cheat can be solid Industrial Organization: Chapter 7

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The Incentive to Cheat Take a straightforward case two indistinguishable Cournot firms making indistinguishable items for each firm MC = $30 advertise request is P = 150 – Q where Q is in thousands Q = q 1 + q 2 Price 150 Demand 30 MC Quantity 150 Industrial Organization: Chapter 7

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The Incentive to Cheat Profit for firm 1 is: p 1 = q 1 (P - c) = q 1 (150 - q 1 - q 2 - 30) = q 1 (120 - q 1 - q 2 ) Solve this for q 1 To boost, separate regarding q 1 :  p 1/q 1 = 120 - 2q 1 - q 2 = 0 q* 1 = 60 - q 2/2 This is the best reaction work for firm 1 The best reaction work for firm 2 is then: q* 2 = 60 - q 1/2 Industrial Organization: Chapter 7

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The Incentive to Cheat These best reaction capacities are effortlessly outlined q 2 q* 1 = 60 - q 2/2 q* 2 = 60 - q 1/2 120 Solving these gives the Cournot-Nash yields: R 1 q C 1 = q C 2 = 40 (thousand) 60 The market cost is: C 40 P C = 150 - 80 = $70 R 2 Profit to each firm is: q 1 p 1 = p 2 = (70 - 30)x40 = $1.6 million 40 60 120 Industrial Organization: Chapter 7

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The Incentive to Cheat (cont.) What if the two firms consent to intrigue? They will concede to the restraining infrastructure yield q 2 This gives an aggregate yield of 60 thousand 120 Each firm creates 30 thousand Price is P M = (150 - 60) = $90 R 1 Profit for each firm is: 60 p 1 = p 2 = (90 - 30)x30 = $1.8 million C 40 30 R 2 q 1 30 40 60 120 Industrial Organization: Chapter 7

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The Incentive to Cheat (cont.) Both firms have an impetus to undermine their assention If firm 1 trusts that firm 2 will deliver 30 units then firm 1 ought to create more than 30 units q 2 Cheating pays!! 120 Firm 1\'s best reaction is: q D 1 = 60 - q M 2/2 = 45 thousand R 1 Total yield is 45 + 25 = 70 thousand Price is P D = 150 - 75 = $75 60 C Profit of firm 1 is (75 - 30)x45 = $2.025 million 40 30 R 2 Profit for firm 2 is (75 - 30)x25 = $1.35 million q 1 30 40 60 120 45 Industrial Organization: Chapter 7

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The Incentive to Cheat (cont.) Both firms have the motivator to undermine their understanding Firm 2 can make similar counts! This gives the accompanying result network: Firm 1 Cooperate (M) Deviate (D) This is the Nash harmony Cooperate (M) (1.8, 1.8) (1.35, 2.025) Firm 2 (1.6, 1.6) Deviate (D) (2.035, 1.35) (1.6, 1.6) Industrial Organization: Chapter 7

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Cartel Stability The cartel in our illustration is flimsy This insecurity is very broad Can we discover instruments that give stable cartels? brutality in one plausibility! are there others? must take away the enticement to cheat remaining in the cartel must be in an association\'s self-intrigue Suppose that the organizations communicate after some time Then it may be conceivable to support the cartel Make swindling unbeneficial Reward "great" conduct Punish "terrible" conduct Industrial Organization: Chapter 7

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Repeated Games Formalizing these thoughts prompts to rehashed recreations a company\'s methodology is contingent on past systems played by the firm and its opponents In the case: bamboozling gives $2.025 million once But then the cartel falls flat, giving benefits of $1.6 million for each period Without deceiving benefits would have been $1.8 million for each period So tricking may not really pay Repeated amusements can turn out to be extremely unpredictable methodologies are required for each conceivable history But a few "principles of the diversion" diminish this multifaceted nature Nash balance decreases the technique space extensively Consider two illustrations Industrial Organization: Chapter 7

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Example 1: Cournot duopoly The result framework from the straightforward Cournot amusement Firm 1 Cooperate (M) Deviate (D) Cooperate (M) (1.8, 1.8) (1.35, 2.025) Firm 2 (1.6, 1.6) Deviate (D) (2.025, 1.35) (1.6, 1.6) Industrial Organization: Chapter 7

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Example 2: A Bertrand Game Firm 1 $105 $130 $160 (7.3125, 7.3125) (7.3125, 7.3125) (8.25, 7.25) (9.375, 5.525) $105 (8.5, 8.5) $130 (7.25, 8.25) (8.5, 8.5) (10, 7.15) Firm 2 $160 (5.525, 9.375) (7.15, 10) (9.1, 9.1) Industrial Organization: Chapter 7

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Repeated Games (cont.) Time "matters" in a rehashed diversion is the diversion limited? T is known ahead of time Exhaustible asset Patent Managerial setting or vast? this is a simple for T not being known: each time the diversion is played quite possibly it will be played again Industrial Organization: Chapter 7

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Repeated Games (cont.) Take a limited amusement: Example 1 played twice A potential methodology would i say i is: will participate in period 1 In period 2 I will coordinate inasmuch as you collaborated in period 1 Otherwise I will abscond from our understanding This technique needs validity neither one of the firms can soundly focus on participation in period 2 so the guarantee is useless The main harmony is to veer off in both periods Industrial Organization: Chapter 7

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Repeated Games (cont.) What if T is "expansive" however limited and known? assume that the diversion has an interesting Nash harmony the main trustworthy result in the last time frame is this balance however then the second last time frame is successfully the last time frame the Nash balance will be played then yet then the third last time frame is viably the last time frame the Nash balance will be played then et cetera The likelihood of collaboration vanishes The Selten Theorem: If an amusement with a one of a kind Nash balance is played limitedly commonly, its answer is that Nash balance played without fail. Case 1 is such a case Industrial Organization: Chapter 7

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Repeated Games (cont.) How to determine this? Two confinements Uniqueness of the Nash harmony Finite play What if the balance is not one of a kind? Illustration 2 A "decent" Nash balance ($130, $130) A "terrible" Nash balance ($105, $105) Both firms might want ($160, $160) Now there is a plausibility of remunerating "great" conduct If you collaborate in the early periods then I should guarantee that we break to the Nash harmony that you like If you break our assention then I might guarantee that we break to the Nash balance that you don\'t care for Industrial Organization: Chapter 7

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A limitedly rehashed amusement Assume that the markdown rate is zero (for straightforwardness) Assume additionally that the organizations associate twice Suggest a cartel in the main time frame and "great" Nash in the second Set cost of $160 in period 1 and $130 in period 2 Present estimation of benefit from this conduct is: PV 2 ( p 1 ) = $9.1 + $8.5 = $17.6 million PV 2 ( p 2 ) = $9.1 + $8.5 = $17.6 million What tenable system bolsters this balance? To start with period: set a cost of $160 Second period: If history from period 1 is ($160, $160) set price of $130, generally set cost of $105. Mechanical Organization: Chapter 7

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A limitedly rehashed amusement These systems reflect authentic reliance each company\'s second time frame activity relies on upon the historical backdrop of play Is this truly a Nash subgame idealize harmony? demonstrate that the system is a best reaction for every player Industrial Organization: Chapter 7

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A limitedly rehashed amusement This is clear in the last time frame the technique blend is a Nash balance neither one of the firms can enhance this What about the primary time frame? why doesn\'t one firm, say firm 2, attempt to enhance its benefits by setting a cost of $130 in the principal time frame? Deserting does not pay for this situation! Consider the effect History into period 2 is ($160, $130) Firm 1 then sets cost $105 Firm 2\'s best reaction is additionally $105: Nash harmony Profit accordingly is PV 2 ( p 1 ) = $10 + $7.3125 = $17.3125 million This is not as much as benefit from participating in period 1 Industrial Organization: Chapter 7

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A limitedly rehashed diversion Defection does not pay! The same applies to firm 1 So we have valid systems that somewhat bolster the cartel Extensions More than tw

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