This paper examines an antitrust enforcement policy of using significant price changes in an industry as a sorting mechanism for the allocation of resources devoted to policing collusion. That is, in either responding to complaints or initiating investigations on their own, I examine the issue of whether an antitrust enforcement policy of inferring possible collusion from significant prices changes is effective in deterring collusion given that antitrust officials have no direct knowledge of the costs of individual firms. Using the imperfect information repeated game of Green and Porter (1984), I show that this investigation strategy if coupled with uniform costs being borne by firms, can reduce the expected profits from the collusive agreement: however, unless the punishment is large enough, it will be ineffective in reducing the frequency of collusion. More importantly, it can have the undesirable effect of reducing the output agreed to by firms, if firms choose quantities, or raise collusive prices if firms are choosing price. Moreover, if the enforcement policy is anticipated by firms, the punishment mechanism adopted to support collusion will be altered to offset the policy.
Review of Industrial Organization – Springer Journals
Published: Oct 15, 2004
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