|Just How Easy is it to Collude?|
|Key Words||collusion, cartel, mergers, game theory, prisoner's dilemma|
|News Story||Sony and Bertelsman, two of the largest record companies in the world, merged together in 2004, creating Sony BMG. That merger reduced the number of major players in the market from five to four - owning about 80% of market sales. Is that enough to induce collusive behavior, if only tacitly?
Economics textbooks suggest that collusion is very difficult because of the incentive to cheat on the collusive agreement. Since collusion is illegal in most countries, punishing cheaters is very difficult, since punishing exposes everyone in a collusive situation.
But is it possible to tacitly collude? Such actions are difficult, because it requires coordination of prices without discussion or explicit understandings. Evidence is scant, but mergers create greater potential for tacit collusion; when Sony BMG was created, and five major firms became four major firms, the ability to tacitly collude increased. The four remaining firms are relatively similar in size, increasing the gains from coordination. All firms will have a similar notion of what the "best price" is in the market.
What's more, the gains from cheating on a collusive agreement fall, because at least in the record industry, punishing cheaters is much easier. One company could quickly come out with "promotional pricing" in retaliation for another's cheating. Such is the nature of the record industry. Wholesale prices are well-known, and there are so many sales, that short-term gains from cheating are relatively small.
In an industry with differentiated products - think of a Deep Purple live CD vs Artist-Formerly-Known-As-Prince Live CD - is it really possible to know whether a company's sales slump is a result of a promotional price or another company's illicit behavior? Justice Departments have the difficult job of trying to distinguish between the two.
|Source||"Silent Orchestration," The Economist. May 3, 2007.|
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