‘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 some contrivance to raise prices.’ (Adam Smith, The Wealth of Nations, 1776).
Introduction.
Many real world markets have a relatively small number of competing firms. Where there are large numbers of competing firms an individual firm’s output and pricing decisions are unlikely to have a major effect on its rivals. By cutting price slightly it may significantly increase its market share, while only taking a negligible share from each of its rivals, thus reducing the likelihood of retaliatory behaviour. However, where there are relatively few firms, then an increase in output/reduction in price by one will firm will have a marked impact on the sales of its rivals and they are likely to react. The essential feature of oligopolistic markets is that firms recognise that their actions will influence the behaviour of their rivals, i.e. they recognise that they are interdependent.
Collusion is a real threat in oligopolistic markets. Such collusion may be explicit in the form of formal agreements or understandings or it may be tacit. Although the consequences of both formal and tacit collusion are the same, they are treated differently under competition law.
Cartels.
Formal collusion involves establishing and maintaining a cartel. There are two common forms of cartel:
Price-fixing agreements can take many forms. In addition to the obvious case of agreements to charge the same price, they can also include agreements on discounts, margins, price differentials, price increases or minimum prices.
Market sharing agreements are an alternative to a price-fixing cartel. They involve firms dividing up the market between them and agreeing not to sell in each other’s designated area. This enables each firm to set prices knowing that its 'rivals' will not undercut them. A market-sharing cartel may be no more than an agreement among firms not to approach each other’s customers or not to sell to those in a particular area. It may involve secretly allocating specific territories to one another or agreeing lists of which customers are to be allocated to which firm.
Firms participating in a cartel have a strong incentive to cheat by offering secret discounts to customers to increase sales. Where there are only a small number of firms it may be easier to detect cheating and ensure that the participants adhere to any cartel arrangement. International experience indicates that cartels involving large numbers of firms are often organised by trade associations who 'police' the agreements to prevent cheating.
Collusion is prohibited under both Irish and EU competition law. In fact collusion is a criminal offence under the Competition (Amendment) Act, 1996. Firms engaging in such practices may be fined up to £3m or 10% of turnover whichever is greater. Mangers and directors of such firms can face similar fines and up to two years imprisonment. The Competition Act, 2002 provides that managers and directors of firms participating in cartels may be imprisoned for up to five years.
Tacit Collusion.
In tightly oligopolistic markets, where there are very few firms, non-competitive outcomes can result without formal collusion. Firms in such markets may simply recognise that it is not in their interests to compete too vigorously on price.
Tacit collusion is difficult with more than a very small number of firms, particularly if they sell a variety of different products. Establishing mutually beneficial prices on a wide range of products given likely differences in cost structures can be difficult without some form of explicit understanding. Even under formal collusive arrangements, firms face incentives to cheat. In the absence of complete communications firms are imperfectly informed about market conditions and rivals’ intentions. In such circumstances actions by rivals may be misunderstood as ‘cheating’ provoking a response and making tacit collusion difficult to maintain. In order to overcome such problems firms may engage in 'facilitating practices'. However, such practices may themselves fall foul of competition law.
Competition Law Treatment of Oligopoly.
There are considerable difficulties in seeking to apply competition law to prevent oligopolistic behaviour that falls short of explicit collusion. Once firms are aware of their interdependence, they cannot be expected or easily compelled to ignore that in deciding their competitive behaviour. In the United States the Supreme Court has observed that ‘conscious parallelism had not yet read conspiracy out of the Sherman Act entirely.’ (Theatre Enterprises, Inc. v. Paramount Film Distributing Corporation et. al., 346 US 537 (1954)). EU case law on concerted practices certainly goes somewhat further than US law in prohibiting practices that stop short of explicit collusion. The Court of Justice, for example, has defined a concerted practice as:
‘A form of co-ordination between undertakings which without having reached the stage where an agreement properly so-called has been concluded, knowingly substitutes practical co-operation between them for the risks of competition.’ (ICI and Others v. Commission, [1972] ECR 619).
Nevertheless the Court has indicated that, while parallel behaviour can be circumstantial evidence of a concerted practice, it cannot be conclusive where there are other explanations of what has taken place.
Nevertheless practices that facilitate collusion in oligopolistic markets, e.g. exchanges of information regarding pricing decisions, which are arguably designed to facilitate tacit collusion would in many instances be likely to fall foul of Article 81. In addtion merger controls may be used to prevent the emergence of oligopolistic market structures. Measures to reduce entry barriers, particularly where these are the result of state restrictions, could also be used to reduce the scope for tacit collusion.
© CompEcon Limited 2002.
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