Nav: Home

Study offers new view of how cartels work

December 19, 2018

Suppose you were building a cartel -- a group of business interests who coordinate to fix high prices that consumers must pay. How would you design it? Received economic wisdom says transparency among cartel members is crucial: If colluding suppliers share information, they can keep prices high and monitor members of the cartel to make sure no one deviates from the cartel's norms.

A newly published paper co-authored by MIT economist Alexander Wolitzky offers a different idea: Firms do not have to share information extensively in order to collude. Indeed, the paper contends, extensive information-sharing can help firms undercut cartels and gain market share for themselves.

"If I'm thinking about entering your market, which I'm not supposed to do, but if I'm tempted to do it, then I can do it better if I have this information about your market," Wolitzky says. The corollary, he notes, is that there appear to be cases where "by not sharing information about their pricing behavior, the firms make it easier to sustain collusion."

The paper is thus a rethinking of an important policy topic: In the U.S., Europe, and across the world, governments are charged with regulating cartels and collusion, in an attempt to ensure that consumers can benefit from market competition.

Given the prevailing notion that data-sharing helps cartels, firms investigated for price-fixing can argue that they must not be illegally colluding if the evidence shows they have not been extensively sharing information with other businesses.

"Because of this conventional wisdom that firms that collude share a lot of information, a firm's defense is, 'We weren't sharing so much information,'" Wolitzky says. And yet, as the new paper suggests, that level of cooperation may not be necessary for collusion to occur.

The paper, "Maintaining Privacy in Cartels," is by Takuo Sugaya, an associate professor at the Stanford Graduate School of Business, and Wolitzky, an associate professor in MIT's Department of Economics; it appears in the December issue of the Journal of Political Economy.

What's the whole story?

The current paper adds to a body of academic literature whose best-known component is "A Theory of Oligopoly," a 1964 paper by economist George Stigler, which describes how the availability of information should help cartels maintain their grip on prices. Some subsequent empirical work also shows that in some conditions, increased transparency helps cartels sustain themselves.

Sugaya and Wolitzky do not deny that a degree of transparency among cartel members helps collusion occur, but they complicate this picture by introducing alternate circumstances, in which less transparency helps cartels thrive and more transparency undercuts them.

"We're investigating the generality of this [older] result, and whether it tells the whole story," says Wolitzky.

The paper by the scholars builds a new model of firm behavior oriented around the "home-market principle" of collusion, in which cartels reduce the competitive supply of products in each other's markets -- which may often be segmented by geographic reach. North American and European firms in the same industry, in this scenario, would stay away from each other's territory, thereby reducing competition.

In the study, the authors contend that there are three effects that increased transparency has on cartels. Transparency within cartels enables firms to keep each other in check, and it helps them coordinate prices -- but it also "lets individual firms tailor deviations to current market conditions," as they write in the paper.

This last point, Sugaya and Wolizky assert, has been seriously underexplored by scholars in the past. In the model they propose, the "deviation gain" -- what happens when a firms leaves the cartel -- "is strictly larger when all prices and quantities are observable," that is, when the firm has more information about its erstwhile collaborators.

Real cartels, low transparency

The proposition that a relative lack of information-sharing coexists with collusion is not just an arbitrary function of the authors' model, but something supported by empirical evidence as well, as they note in the paper. The European Commission, for instance, has uncovered several cartels that seemingly made a point of limiting transparency: The firms in question largely shared just industry-wide sales data among all members, not extensive firm-level data.

These low-transparency cartels include industries such as plasterboard production, copper plumbing tube manufacturing, and plastics -- all of whom structured their collusion operations around intermediaries. Those intermediaries -- industry associations, in some cases -- handled the sensitive information and only distributed small portions of it to the individual firms.

A more vivid example comes from a graphite manufacturing cartel, as Sugaya and Wolitzky recount. At a meeting of cartel representatives, each member secretly entered their own sales data into a calculator passed around the room, in such a way that the firms could only learn the industry-wide sales volume, not the specific sales data of each firm.

Such examples indicate that "conventional wisdom may not tell the whole story" when it comes to cartels and transparency, Sugaya and Wolitzky write.

To be sure, the new theory developed by the scholars does not propose a uniform relationship between transparency and collusion; it all depends on the circumstances.

"It would be nice to have a very thorough characterization of when more information among cartel members makes colluding easier, and when it makes it harder," Wolitzky says.

In the new model, Sugaya and Wolitzky do suggest that greater transparency corresponds with collusion specifically in volatile business conditions, which may necessitate more robust long-term projections of sales and demand. By contrast, given less volatile, more consistent consumer demand over time, firms need less transparency to deviate from tacit collusion agreements and undercut their erstwhile cartel partners. As the authors acknowledge, firm behavior within cartels, in a variety of these circumstances, could use further study.
Wolitzky received support for the research from the National Science Foundation.

Related links

PAPER: Maintaining Privacy in Cartels

ARCHIVE: What game theory tells us about politics and society

Massachusetts Institute of Technology

Related Data Articles:

Data centers use less energy than you think
Using the most detailed model to date of global data center energy use, researchers found that massive efficiency gains by data centers have kept energy use roughly flat over the past decade.
Storing data in music
Researchers at ETH Zurich have developed a technique for embedding data in music and transmitting it to a smartphone.
Life data economics: calling for new models to assess the value of human data
After the collapse of the blockchain bubble a number of research organisations are developing platforms to enable individual ownership of life data and establish the data valuation and pricing models.
Geoscience data group urges all scientific disciplines to make data open and accessible
Institutions, science funders, data repositories, publishers, researchers and scientific societies from all scientific disciplines must work together to ensure all scientific data are easy to find, access and use, according to a new commentary in Nature by members of the Enabling FAIR Data Steering Committee.
Democratizing data science
MIT researchers are hoping to advance the democratization of data science with a new tool for nonstatisticians that automatically generates models for analyzing raw data.
Getting the most out of atmospheric data analysis
An international team including researchers from Kanazawa University used a new approach to analyze an atmospheric data set spanning 18 years for the investigation of new-particle formation.
Ecologists ask: Should we be more transparent with data?
In a new Ecological Applications article, authors Stephen M. Powers and Stephanie E.
Should you share data of threatened species?
Scientists and conservationists have continually called for location data to be turned off in wildlife photos and publications to help preserve species but new research suggests there could be more to be gained by sharing a rare find, rather than obscuring it, in certain circumstances.
Futuristic data storage
The development of high-density data storage devices requires the highest possible density of elements in an array made up of individual nanomagnets.
Making data matter
The advent of 3-D printing has made it possible to take imaging data and print it into physical representations, but the process of doing so has been prohibitively time-intensive and costly.
More Data News and Data Current Events

Trending Science News

Current Coronavirus (COVID-19) News

Top Science Podcasts

We have hand picked the top science podcasts of 2020.
Now Playing: TED Radio Hour

Listen Again: Reinvention
Change is hard, but it's also an opportunity to discover and reimagine what you thought you knew. From our economy, to music, to even ourselves–this hour TED speakers explore the power of reinvention. Guests include OK Go lead singer Damian Kulash Jr., former college gymnastics coach Valorie Kondos Field, Stockton Mayor Michael Tubbs, and entrepreneur Nick Hanauer.
Now Playing: Science for the People

#562 Superbug to Bedside
By now we're all good and scared about antibiotic resistance, one of the many things coming to get us all. But there's good news, sort of. News antibiotics are coming out! How do they get tested? What does that kind of a trial look like and how does it happen? Host Bethany Brookeshire talks with Matt McCarthy, author of "Superbugs: The Race to Stop an Epidemic", about the ins and outs of testing a new antibiotic in the hospital.
Now Playing: Radiolab

Dispatch 6: Strange Times
Covid has disrupted the most basic routines of our days and nights. But in the middle of a conversation about how to fight the virus, we find a place impervious to the stalled plans and frenetic demands of the outside world. It's a very different kind of front line, where urgent work means moving slow, and time is marked out in tiny pre-planned steps. Then, on a walk through the woods, we consider how the tempo of our lives affects our minds and discover how the beats of biology shape our bodies. This episode was produced with help from Molly Webster and Tracie Hunte. Support Radiolab today at