HAT Manifesto Part 1/3 - Rubric Cube - 250803 edit

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 5 Firm Behavior and the Organization of Industry

Chapter 17 of 36 - Oligopoly

Section 17 of 22

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(This article here in chapter)

“Market Talk” - Alistair Lindsay

If a group of different company producers of the same product coordinates their prices in private meetings, they can be sent to jail for antitrust law criminal violations.

What if they discuss the same topic in public?

Most companies have antitrust compliance policies.

They typically identify a number of things officers and employees should not do, on pain of criminal liability, fines and unlimited damages actions.

All make clear companies must not agree with their competitors to fix prices.

But it raises an important question: Can companies coordinate price increases without infringing the cartel rules?

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In markets where competitors need to publish their prices to win business –for example, many retail markets- it is perfectly lawful to shadow a rival's increases, so long as each seller acts entirely independently in setting its charges.

The very definition of an oligopoly is a market involving a small number of suppliers that set their own commercial strategies but consider their competitors’ actions.

One competitor may emerge as a leader, with others taking their cue on when to raise prices and by how much.

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When prices are privately negotiated between seller and buyer as in many industrial markets it is common for a customer to volunteer information about a rival's prices to obtain leverage:

"You've quoted $200 per ton, but X is offering $190 and I'm going to them unless you can do better."

A company that receives this information obtains valuable intelligence about what its rivals are charging, but it does not infringe cartel rules.

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Companies also sometimes signal to one another in their communications with investors.

A competitor which informs the markets it expects a price war to end in February is providing relevant information to actual and potential owners of its stock.

But of course, its rivals read the same reports and can change their strategies accordingly.

So, a statement to the market can serve as just as much of a signal to competitors as a statement made during a cartel meeting.

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Signaling through investor communications raises difficult questions for anti-cartel enforcement.

Government enforcers want to protect consumers from the adverse effects of blatant signaling, but not at the price of losing transparency in financial markets.

For example, it is highly relevant to an investor to know an airline's predicted growth of per-mile passenger revenue for the next quarter.

But a rival airline might use the announced figure as a benchmark when setting its own fares for the next quarter.

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As things stand, anti-cartel enforcers have focused their efforts in such situations on blocking mergers in markets where price and revenue signaling is prevalent, arguing consolidation in such markets can further dampen competition by making coordination easier or more successful.

However, they have not taken high-profile action alleging cartel infringements against companies for announcements made to investors.

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If there is no justification for a particular announcement other than to signal to competitors, anti-cartel enforcers should seek to intervene.

In this case the public announcement is analytically the same as a private discussion directly with the rivals, and consumers can be harmed.

But most announcements do serve legitimate purposes, such as keeping investors informed.

Given the disparate policy objectives in play, the decision by anti-cartel authorities of when they should or should not intervene can be difficult and complex.

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difficult and complex

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