Collusion at the Extensive Margin

Martin Byford
University of Colorado, Boulder

Joshua Gans
University of Melbourne

27th April, 2010

Monday, 10 May 2010

 Introduction
The Model

Introduction Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Introduction Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at the intensive margin involves firms coordinating their

strategic actions within the markets in which they come into contact.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Introduction Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at the intensive margin involves firms coordinating their

strategic actions within the markets in which they come into contact.

Collusion at the extensive margin involves firms coordinating their

participation across markets in order to avoid coming into contact.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Introduction Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at the intensive margin involves firms coordinating their

strategic actions within the markets in which they come into contact.

Collusion at the extensive margin involves firms coordinating their

participation across markets in order to avoid coming into contact.

The two forms of collusion can be hard to distinguish where a

market can be segmented (e.g., each discrete customer can be a
‘market’).
Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Motivating Case Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Motivating Case Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

In 2001, Australian Competition and Consumer Commission took

Rural Press and Waikerie to the Federal Court of Australia alleging
anti-competitive agreement, exclusionary conduct and abuse of
market power.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Motivating Case Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

In 2001, Australian Competition and Consumer Commission took

Rural Press and Waikerie to the Federal Court of Australia alleging
anti-competitive agreement, exclusionary conduct and abuse of
market power.

Matter went all the way to the High Court of Australia with the anti-
competitive agreement case upheld.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Motivating Case Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

In 2001, Australian Competition and Consumer Commission took

Rural Press and Waikerie to the Federal Court of Australia alleging
anti-competitive agreement, exclusionary conduct and abuse of
market power.

Matter went all the way to the High Court of Australia with the anti-
competitive agreement case upheld.

The basic story was one of collusion at the extensive margin.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Rural Press and Waikerie

Monday, 10 May 2010

 Rural Press and Waikerie

0 50 100

Monday, 10 May 2010

 Rural Press and Waikerie

0 50 100

Monday, 10 May 2010

 Rural Press and Waikerie

0 50 100

Monday, 10 May 2010

 Initial Entry

0 50 100

Monday, 10 May 2010

 Initial Entry

0 50 100

Monday, 10 May 2010

 Introduction
The Model

The Threat Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
The attached copies of pages from The River News were sent to me last
Conclusions
week. The Mannum advertising was again evident, which suggests your
Waikerie operator, John Pick, is still not focussing on the traditional area of
operations.

I wanted to formally record my desire to reach an understanding with your

family in terms of where each of us focuses our publishing efforts.

If you continue to attack in Mannum, a prime readership area of the Murray

Valley Standard, it may be we will have to look at expanding our operations
into areas that we have not traditionally services [sic].

I thought I would write to you so there could be no misunderstanding our

position. I will not bother you again on this subject.

Collusion at
the Extensive
Ian Law, Rural Press, 7 April 1998 Margin

Monday, 10 May 2010

 The Threat

0 50 100

Monday, 10 May 2010

 The Threat

0 50 100

Monday, 10 May 2010

 The Response

0 50 100

Monday, 10 May 2010

 The Response

0 50 100

Monday, 10 May 2010

 Introduction
The Model

Bell Atlantic v. Twombly Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Bell Atlantic v. Twombly Collusive Equilibria

Uncertainty
Stability
Plaintiffs alleged that local telephone companies following deregulation in Antitrust
1996, had refrained from entering each others’ geographic markets. Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Bell Atlantic v. Twombly Collusive Equilibria

Uncertainty
Stability
Plaintiffs alleged that local telephone companies following deregulation in Antitrust
1996, had refrained from entering each others’ geographic markets. Implications
Conclusions

The US Supreme Court found that “sparse competition among large firms
dominating separate geographical segments of the market could very well
signify illegal agreement.”

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Bell Atlantic v. Twombly Collusive Equilibria

Uncertainty
Stability
Plaintiffs alleged that local telephone companies following deregulation in Antitrust
1996, had refrained from entering each others’ geographic markets. Implications
Conclusions

The US Supreme Court found that “sparse competition among large firms
dominating separate geographical segments of the market could very well
signify illegal agreement.”

However, the Baby Bells had been regulated to prevent such competition and
so it was not surprising that ‘old habits’ continued.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Bell Atlantic v. Twombly Collusive Equilibria

Uncertainty
Stability
Plaintiffs alleged that local telephone companies following deregulation in Antitrust
1996, had refrained from entering each others’ geographic markets. Implications
Conclusions

The US Supreme Court found that “sparse competition among large firms
dominating separate geographical segments of the market could very well
signify illegal agreement.”

However, the Baby Bells had been regulated to prevent such competition and
so it was not surprising that ‘old habits’ continued.

It was argued that the plaintiffs would have to demonstrate that the Baby Bells
were sacrificing profits by refraining from such entry.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Bell Atlantic v. Twombly Collusive Equilibria

Uncertainty
Stability
Plaintiffs alleged that local telephone companies following deregulation in Antitrust
1996, had refrained from entering each others’ geographic markets. Implications
Conclusions

The US Supreme Court found that “sparse competition among large firms
dominating separate geographical segments of the market could very well
signify illegal agreement.”

However, the Baby Bells had been regulated to prevent such competition and
so it was not surprising that ‘old habits’ continued.

It was argued that the plaintiffs would have to demonstrate that the Baby Bells
were sacrificing profits by refraining from such entry.

Further, “[T]here is no reason to infer that the companies had agreed among
themselves to do what was only natural anyway; so natural, in fact, that if
alleging parallel decisions to resist competition were enough to imply an Collusion at
antitrust conspiracy, pleading a §1 violation against almost any group of the Extensive
Margin
competing businesses would be a sure thing.”
Monday, 10 May 2010
 Introduction
The Model

Research Questions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Research Questions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

What conditions support collusion at the extensive margin?

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Research Questions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

What conditions support collusion at the extensive margin?

How does the presence of multiple markets facilitate collusion?

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Research Questions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

What conditions support collusion at the extensive margin?

How does the presence of multiple markets facilitate collusion?

Can different enforcement mechanisms generate different stability

and performance outcomes?

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Research Questions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

What conditions support collusion at the extensive margin?

How does the presence of multiple markets facilitate collusion?

Can different enforcement mechanisms generate different stability

and performance outcomes?

Where can collusion be detected?

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Contrasting Literature Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Contrasting Literature Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications

Fudenberg and Maskin (1986) demonstrated the set of equilibria Conclusions

supported under the folk theorem.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Contrasting Literature Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications

Fudenberg and Maskin (1986) demonstrated the set of equilibria Conclusions

supported under the folk theorem.

Green and Porter (1984) show that firms may employ temporary
punishments to facilitate collusion in the presence of uncertainty.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Contrasting Literature Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications

Fudenberg and Maskin (1986) demonstrated the set of equilibria Conclusions

supported under the folk theorem.

Green and Porter (1984) show that firms may employ temporary
punishments to facilitate collusion in the presence of uncertainty.

Bernheim and Whinston (1990) show that multi-market contact can

facilitate collusion by pooling participation constraints.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Contrasting Literature Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications

Fudenberg and Maskin (1986) demonstrated the set of equilibria Conclusions

supported under the folk theorem.

Green and Porter (1984) show that firms may employ temporary
punishments to facilitate collusion in the presence of uncertainty.

Bernheim and Whinston (1990) show that multi-market contact can

facilitate collusion by pooling participation constraints.

Edwards (1955): conglomerates have scope to engage in mutual

forbearance.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Contrasting Literature Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications

Fudenberg and Maskin (1986) demonstrated the set of equilibria Conclusions

supported under the folk theorem.

Green and Porter (1984) show that firms may employ temporary
punishments to facilitate collusion in the presence of uncertainty.

Bernheim and Whinston (1990) show that multi-market contact can

facilitate collusion by pooling participation constraints.

Edwards (1955): conglomerates have scope to engage in mutual

forbearance.

This paper: understand collusion across markets. Collusion at

the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Bernheim-Whinston (1990) Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Bernheim-Whinston (1990) Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Simple intuition: firms should enter multiple markets to improve

cartel stability.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Bernheim-Whinston (1990) Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Simple intuition: firms should enter multiple markets to improve

cartel stability.

Complication: requires some combination of non-identical firms,

markets and non-constant returns to scale.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Bernheim-Whinston (1990) Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Simple intuition: firms should enter multiple markets to improve

cartel stability.

Complication: requires some combination of non-identical firms,

markets and non-constant returns to scale.
That is, multi-market contact is irrelevant with identical firms,
markets and constant returns to scale.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Bernheim-Whinston (1990) Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Simple intuition: firms should enter multiple markets to improve

cartel stability.

Complication: requires some combination of non-identical firms,

markets and non-constant returns to scale.
That is, multi-market contact is irrelevant with identical firms,
markets and constant returns to scale.

Did not consider the possibility that collusion might involve market
forbearance.
Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Outline Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Outline Collusive Equilibria

Uncertainty
Stability

Basic model set-up: multi-contest environment Antitrust

Implications
Use Markov Perfect Equilibrium Conclusions

Add ‘observable friction’ to entry/exit decision for simple history dependence

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Outline Collusive Equilibria

Uncertainty
Stability

Basic model set-up: multi-contest environment Antitrust

Implications
Use Markov Perfect Equilibrium Conclusions

Add ‘observable friction’ to entry/exit decision for simple history dependence

Results
Competitive equilibrium
Collusive equilibrium
Multi-lateral enforcement
Proportionate Response
Key Feature: punishment not costly
Uncertainty over state
Proportionate Response higher expected return than other enforcement
mechanisms Collusion at
the Extensive
Policy implications for detection of collusive behaviour Margin

Monday, 10 May 2010

 Introduction
The Model

Primitives Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Primitives Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
A set I = {1,…, I} of firms. Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Primitives Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
A set I = {1,…, I} of firms. Conclusions

A set N = {1,…, N} of distinct markets or separable market

segments.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Primitives Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
A set I = {1,…, I} of firms. Conclusions

A set N = {1,…, N} of distinct markets or separable market

segments.

Oligopolistic profit to a firm in a market with m participants: π*(m).

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Primitives Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
A set I = {1,…, I} of firms. Conclusions

A set N = {1,…, N} of distinct markets or separable market

segments.

Oligopolistic profit to a firm in a market with m participants: π*(m).

Infinite number of periods.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Primitives Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
A set I = {1,…, I} of firms. Conclusions

A set N = {1,…, N} of distinct markets or separable market

segments.

Oligopolistic profit to a firm in a market with m participants: π*(m).

Infinite number of periods.

All firms have identical discount factor, δ.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Primitives Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
A set I = {1,…, I} of firms. Conclusions

A set N = {1,…, N} of distinct markets or separable market

segments.

Oligopolistic profit to a firm in a market with m participants: π*(m).

Infinite number of periods.

All firms have identical discount factor, δ.

Collusion at
Note: In paper, markets and firms can be heterogeneous. the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Basics Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Basics Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Each market is modelled as a repeated simultaneous moves non-

cooperative game.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Basics Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Each market is modelled as a repeated simultaneous moves non-

cooperative game.

Assumption 1: In a one shot game each market produces a unique

(expected) equilibrium payoff vector for each profile of participation.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Timing

Monday, 10 May 2010

 Timing

Period t

Monday, 10 May 2010

 Timing

Transition
Stage

Period t

Monday, 10 May 2010

 Timing

Transition
Stage

Period t State Revealed

Monday, 10 May 2010

 Timing

Transition Market
Stage Stage

Period t State Revealed

Monday, 10 May 2010

 Timing

Transition Market
Stage Stage

Instantaneous
Period t State Revealed
Profits Realised

Monday, 10 May 2010

 Introduction
The Model

The Transition Stage Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

The Transition Stage Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions
In the transition stage firm’s simultaneously select the subset of
markets in which they wish to pursue a presence.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

The Transition Stage Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions
In the transition stage firm’s simultaneously select the subset of
markets in which they wish to pursue a presence.

Following the transition stage each firm’s participation in a market is

represented by one of four states.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

The Transition Stage Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions
In the transition stage firm’s simultaneously select the subset of
markets in which they wish to pursue a presence.

Following the transition stage each firm’s participation in a market is

represented by one of four states.
Absence: The player is not engaged in the contest.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

The Transition Stage Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions
In the transition stage firm’s simultaneously select the subset of
markets in which they wish to pursue a presence.

Following the transition stage each firm’s participation in a market is

represented by one of four states.
Absence: The player is not engaged in the contest.
Entry: The player is in the process of entering the contest.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

The Transition Stage Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions
In the transition stage firm’s simultaneously select the subset of
markets in which they wish to pursue a presence.

Following the transition stage each firm’s participation in a market is

represented by one of four states.
Absence: The player is not engaged in the contest.
Entry: The player is in the process of entering the contest.
Presence: The player is an active participant in the contest.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

The Transition Stage Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions
In the transition stage firm’s simultaneously select the subset of
markets in which they wish to pursue a presence.

Following the transition stage each firm’s participation in a market is

represented by one of four states.
Absence: The player is not engaged in the contest.
Entry: The player is in the process of entering the contest.
Presence: The player is an active participant in the contest.
Exit: The player is in the process of exiting the contest.
Collusion at
the Extensive
Margin

Monday, 10 May 2010

Monday, 10 May 2010
 Absence

Monday, 10 May 2010

 Absence

Monday, 10 May 2010

 Absence Entry

Monday, 10 May 2010

 Absence Entry

Presence

Monday, 10 May 2010

 Absence Entry

Presence Exit

Monday, 10 May 2010

 Absence Entry

Presence Exit

Monday, 10 May 2010

 Absence Entry

Presence Exit

Monday, 10 May 2010

 Absence Entry

Presence Exit

Monday, 10 May 2010

 Absence Entry

Presence Exit

Monday, 10 May 2010

 Introduction
The Model

The Market Stage Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

The Market Stage Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

A firm participates in every market in which it has a presence or is in

the process of exiting.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

The Market Stage Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

A firm participates in every market in which it has a presence or is in

the process of exiting.

Lemma 1: In a Markov perfect equilibrium (MPE) each firm takes its

static Nash equilibrium action in the market stage, subject to the
prevailing profile of participation.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

The Market Stage Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

A firm participates in every market in which it has a presence or is in

the process of exiting.

Lemma 1: In a Markov perfect equilibrium (MPE) each firm takes its

static Nash equilibrium action in the market stage, subject to the
prevailing profile of participation.

Initially we assume that markets are identical, separable and

symmetric.
Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Instantaneous Profit Assumptions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Instantaneous Profit Assumptions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Assumption 2 (Expansion Incentive): Entry into an additional market

is alway profitable for a firm, holding the participation of the
remaining firms constant.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Instantaneous Profit Assumptions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Assumption 2 (Expansion Incentive): Entry into an additional market

is alway profitable for a firm, holding the participation of the
remaining firms constant.

The MPE instantaneous profit π*(m) > 0 for all m ≤ I.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Instantaneous Profit Assumptions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Assumption 2 (Expansion Incentive): Entry into an additional market

is alway profitable for a firm, holding the participation of the
remaining firms constant.

The MPE instantaneous profit π*(m) > 0 for all m ≤ I.

Proposition 1 (Competitive Equilibrium): Where assumptions 1 and

2 holds it is an MPE for all firms to enter and remain in every market.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Instantaneous Profit Assumptions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Assumption 2 (Expansion Incentive): Entry into an additional market

is alway profitable for a firm, holding the participation of the
remaining firms constant.

The MPE instantaneous profit π*(m) > 0 for all m ≤ I.

Proposition 1 (Competitive Equilibrium): Where assumptions 1 and

2 holds it is an MPE for all firms to enter and remain in every market.

∗ m
MPE instantaneous profits satisfy π (m) > π ∗ (m + 1).
m+1 Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Collusive Equilibrium Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Collusive Equilibrium Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Where collusion takes place at the extensive margin a collusive

agreement has two components:

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Collusive Equilibrium Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Where collusion takes place at the extensive margin a collusive

agreement has two components:

A partition Q of the set N of markets that either assigns a market to

a firm or to a contested partition in which all firms participate. A
collusive partition is characterised by the number of markets ni in
each firm i’s component of the partition.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Collusive Equilibrium Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Where collusion takes place at the extensive margin a collusive

agreement has two components:

A partition Q of the set N of markets that either assigns a market to

a firm or to a contested partition in which all firms participate. A
collusive partition is characterised by the number of markets ni in
each firm i’s component of the partition.

An enforcement mechanism that utilises the threat of reciprocal

entry to counter the expansion incentive.
Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model
Grim-Strategy Equilibrium Collusive Equilibria
Uncertainty
Stability
Antitrust
Implications
Conclusions

π (1) > I π (I )
* *

⎡
⎢
∑ j ≠i
n j π *
(2) ⎤
⎥
δ ≥δ GS
= max i
⎢⎣ ni (π (1) − π (I )) + ∑ j ≠i n j (π (2) − π (I )) ⎥⎦ Collusion at
* * * *
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model
Grim-Strategy Equilibrium Collusive Equilibria
Uncertainty
Stability
Antitrust
Implications
Suppose that if one firm enters another firm’s market, all firms enter
Conclusions
all markets forever.

π (1) > I π (I )
* *

⎡
⎢
∑ j ≠i
n j π *
(2) ⎤
⎥
δ ≥δ GS
= max i
⎢⎣ ni (π (1) − π (I )) + ∑ j ≠i n j (π (2) − π (I )) ⎥⎦ Collusion at
* * * *
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model
Grim-Strategy Equilibrium Collusive Equilibria
Uncertainty
Stability
Antitrust
Implications
Suppose that if one firm enters another firm’s market, all firms enter
Conclusions
all markets forever.

There exists a δ ∈ (0, 1) such that the partition Q can be supported

by multilateral enforcement if and only if for all i ∈ I,

π (1) > I π (I )
* *

⎡
⎢
∑ j ≠i
n j π *
(2) ⎤
⎥
δ ≥δ GS
= max i
⎢⎣ ni (π (1) − π (I )) + ∑ j ≠i n j (π (2) − π (I )) ⎥⎦ Collusion at
* * * *
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Multi-Markets Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Multi-Markets Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Does multi-market contact facilitate collusion more than multi-market

avoidance?

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Multi-Markets Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Does multi-market contact facilitate collusion more than multi-market

avoidance?

Bernheim-Whinston (1990): depends on firm/market asymmetries

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Multi-Markets Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Does multi-market contact facilitate collusion more than multi-market

avoidance?

Bernheim-Whinston (1990): depends on firm/market asymmetries

Here, when products are close substitutes, lower discount factors

support collusion at the extensive margin than collusion at the
intensive margin.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Targeted Enforcement Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Targeted Enforcement Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at the extensive margin invites a richer set of enforcement

mechanisms that are (a) temporary and (b) target infringers more
directly.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Targeted Enforcement Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at the extensive margin invites a richer set of enforcement

mechanisms that are (a) temporary and (b) target infringers more
directly.

When there is uncertainty, we can demonstrate that targeted

enforcement is both more stable and more profitable. This provides a
rationale for proportional response.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

Monday, 10 May 2010
 Partitioning Contests
Firm 1 Firm 2

Contested

Firm 3

Monday, 10 May 2010

 Introduction
The Model

Multilateral Enforcement Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Multilateral Enforcement Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Multilateral enforcement requires a deviation to be punished by

temporary reversion to the competitive equilibrium.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Multilateral Enforcement Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Multilateral enforcement requires a deviation to be punished by

temporary reversion to the competitive equilibrium.

If at least one firm is entering or present in another firm’s market, and

at least one firm is not entering or present in every market, then all
firms enter every market.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Multilateral Enforcement Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Multilateral enforcement requires a deviation to be punished by

temporary reversion to the competitive equilibrium.

If at least one firm is entering or present in another firm’s market, and

at least one firm is not entering or present in every market, then all
firms enter every market.

Otherwise all firms withdraw from every market belonging to a rival

player.
Collusion at
the Extensive
Margin

Monday, 10 May 2010

Monday, 10 May 2010
 Initial Deviation (t = 1)
Firm 1 Firm 2

Contested

Firm 3

Monday, 10 May 2010

 Initial Deviation (t = 1)
Firm 1 Firm 2

Contested

Firm 3

Monday, 10 May 2010

 Tit-for-Tat Response (t = 2)
Firm 1 Firm 2

Contested

Firm 3

Monday, 10 May 2010

 Tit-for-Tat Response (t = 2)
Firm 1 Firm 2

E
P

E Contested E
E E

Firm 3
E E

E E
E E
Monday, 10 May 2010
 Tit-for-Tat Response (t = 2)

Firm 1 Firm 2 Firm 3

Monday, 10 May 2010

 Tit-for-Tat Response (t = 2)

Firm 1 Firm 2 Firm 3

Gain in Period 2 π ∗ (2)

Monday, 10 May 2010

 Tit-for-Tat Response (t = 2)

Firm 1 Firm 2 Firm 3

Gain in Period 2 π ∗ (2)

Loss in Period 2 π ∗ (1) − π ∗ (2)

Monday, 10 May 2010

 Withdrawal (t = 3)
Firm 1 Firm 2

w
w

w Contested w
w w

Firm 3
w w

w w
w w
Monday, 10 May 2010
 Tit-for-Tat Response (t = 2)

Firm 1 Firm 2 Firm 3

Gain in Period 2 π ∗ (2)

Loss in Period 2 π ∗ (1) − π ∗ (2)

Monday, 10 May 2010

 Tit-for-Tat Response (t = 2)

Firm 1 Firm 2 Firm 3

Gain in Period 2 π ∗ (2)

Loss in Period 2 π ∗ (1) − π ∗ (2)

Gain in Period 3 4π ∗ (3) 4π ∗ (3) 4π ∗ (3)

Monday, 10 May 2010

 Tit-for-Tat Response (t = 2)

Firm 1 Firm 2 Firm 3

Gain in Period 2 π ∗ (2)

Loss in Period 2 π ∗ (1) − π ∗ (2)

Gain in Period 3 4π ∗ (3) 4π ∗ (3) 4π ∗ (3)

� ∗ ∗
� � ∗ ∗
� � ∗ ∗
�
Loss in Period 3 2 π (1) − π (3) 2 π (1) − π (3) 2 π (1) − π (3)

Monday, 10 May 2010

 Equilibrium Path (t > 3)
Firm 1 Firm 2

Contested

Firm 3

Monday, 10 May 2010

 Introduction
The Model

Stability Conditions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Stability Conditions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
The worst case deviation occurs where the firm with the fewest Conclusions
markets deviates by entering all markets belonging to rival firms.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Stability Conditions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
The worst case deviation occurs where the firm with the fewest Conclusions
markets deviates by entering all markets belonging to rival firms.

There exists a δ ∈ (0, 1) such that the partition Q can be supported

by multilateral enforcement if and only if for all i ∈ I,

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Stability Conditions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
The worst case deviation occurs where the firm with the fewest Conclusions
markets deviates by entering all markets belonging to rival firms.

There exists a δ ∈ (0, 1) such that the partition Q can be supported

by multilateral enforcement if and only if for all i ∈ I,

� � � � �
∗ ∗ ∗ ∗
nj π (2) + π (I) < ni π (1) − π (I) .
j�=i

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Stability Conditions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
The worst case deviation occurs where the firm with the fewest Conclusions
markets deviates by entering all markets belonging to rival firms.

There exists a δ ∈ (0, 1) such that the partition Q can be supported

by multilateral enforcement if and only if for all i ∈ I,

� � � � �
∗ ∗ ∗ ∗
nj π (2) + π (I) < ni π (1) − π (I) .
j�=i

� � �
∗
n
j�=i j π (2)
δ ≥ δM L = max �
i∈I ni π ∗ (1) − j∈I n j π ∗ (I)
Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Non-Critical Assumptions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Non-Critical Assumptions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Identical Markets: Instantaneous profits in a market are insensitive to

the market’s label.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Non-Critical Assumptions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Identical Markets: Instantaneous profits in a market are insensitive to

the market’s label.

Symmetry: Instantaneous profits in a market are insensitive to the

identity of firms.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Non-Critical Assumptions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Identical Markets: Instantaneous profits in a market are insensitive to

the market’s label.

Symmetry: Instantaneous profits in a market are insensitive to the

identity of firms.

Separable Markets: Instantaneous profits in a market are

independent of actions taken in any other market.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Critical Assumptions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Critical Assumptions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Assumption 1: In a one shot game each market produces a unique

(expected) equilibrium payoff vector for each profile of participation.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Critical Assumptions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Assumption 1: In a one shot game each market produces a unique

(expected) equilibrium payoff vector for each profile of participation.

Assumption 2 (Expansion Incentive): Entry into an additional market

is alway profitable for a firm, holding the participation of the
remaining firms constant.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Heavy-Handed Enforcement Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Heavy-Handed Enforcement Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

The heavy-handed enforcement mechanism treats each pair of firms

independently.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Heavy-Handed Enforcement Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

The heavy-handed enforcement mechanism treats each pair of firms

independently.

For each pair of firms {i, j}, if firm i is entering or present in at least
one of firm j’s markets, and firms i and j are not entering or present
in all of each others markets, then both firms enter all of each others
markets.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Heavy-Handed Enforcement Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

The heavy-handed enforcement mechanism treats each pair of firms

independently.

For each pair of firms {i, j}, if firm i is entering or present in at least
one of firm j’s markets, and firms i and j are not entering or present
in all of each others markets, then both firms enter all of each others
markets.

Otherwise firms i and j withdraw from every market belonging to

the other player.
Collusion at
the Extensive
Margin

Monday, 10 May 2010

Monday, 10 May 2010
 Initial Deviation (t = 1)
Firm 1 Firm 2

Contested

Firm 3

Monday, 10 May 2010

 Initial Deviation (t = 1)
Firm 1 Firm 2

Contested

Firm 3

Monday, 10 May 2010

 Tit-for-Tat Response (t = 2)
Firm 1 Firm 2

Contested

Firm 3

Monday, 10 May 2010

 Tit-for-Tat Response (t = 2)
Firm 1 Firm 2

E Contested E

Firm 3
E

Monday, 10 May 2010

 Tit-for-Tat Response (t = 2)

Firm 1 Firm 2 Firm 3

Monday, 10 May 2010

 Tit-for-Tat Response (t = 2)

Firm 1 Firm 2 Firm 3

Gain in Period 2 π ∗ (2)

Loss in Period 2 π ∗ (1) − π ∗ (2)

Monday, 10 May 2010

 Withdrawal (t = 3)
Firm 1 Firm 2

w Contested w

Firm 3
w

Monday, 10 May 2010

 Tit-for-Tat Response (t = 2)

Firm 1 Firm 2 Firm 3

Gain in Period 2 π ∗ (2)

Loss in Period 2 π ∗ (1) − π ∗ (2)

Monday, 10 May 2010

 Tit-for-Tat Response (t = 2)

Firm 1 Firm 2 Firm 3

Gain in Period 2 π ∗ (2)

Loss in Period 2 π ∗ (1) − π ∗ (2)

Gain in Period 3 2π ∗ (2) 2π ∗ (2)

Monday, 10 May 2010

 Tit-for-Tat Response (t = 2)

Firm 1 Firm 2 Firm 3

Gain in Period 2 π ∗ (2)

Loss in Period 2 π ∗ (1) − π ∗ (2)

Gain in Period 3 2π ∗ (2) 2π ∗ (2)

� ∗ ∗
� � ∗ ∗
�
Loss in Period 3 2 π (1) − π (2) 2 π (1) − π (2)

Monday, 10 May 2010

 Equilibrium Path (t > 3)
Firm 1 Firm 2

Contested

Firm 3

Monday, 10 May 2010

 Introduction
The Model

Stability Conditions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Stability Conditions Collusive Equilibria

Uncertainty
Stability
Antitrust
The worst case deviation occurs where the firm with the fewest Implications
markets deviates by entering all markets belonging to a subset of rival Conclusions
firms.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Stability Conditions Collusive Equilibria

Uncertainty
Stability
Antitrust
The worst case deviation occurs where the firm with the fewest Implications
markets deviates by entering all markets belonging to a subset of rival Conclusions
firms.

There exists a δ ∈ (0,1) such that the partition Q can be supported

by multilateral enforcement if and only if for all i ∈ I and K ⊆ I \{i},

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Stability Conditions Collusive Equilibria

Uncertainty
Stability
Antitrust
The worst case deviation occurs where the firm with the fewest Implications
markets deviates by entering all markets belonging to a subset of rival Conclusions
firms.

There exists a δ ∈ (0,1) such that the partition Q can be supported

by multilateral enforcement if and only if for all i ∈ I and K ⊆ I \{i},

� 1 � ∗ �
∗ ∗
nj π (2) < ni π (1) − π (�K� + 1) .
2
j∈K

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Stability Conditions Collusive Equilibria

Uncertainty
Stability
Antitrust
The worst case deviation occurs where the firm with the fewest Implications
markets deviates by entering all markets belonging to a subset of rival Conclusions
firms.

There exists a δ ∈ (0,1) such that the partition Q can be supported

by multilateral enforcement if and only if for all i ∈ I and K ⊆ I \{i},

� 1 � ∗ �
∗ ∗
nj π (2) < ni π (1) − π (�K� + 1) .
2
j∈K

� � � ��
∗
HH j∈K nj π (2)
δ≥δ = max max � � �
i∈I K⊆I\{i} ni π ∗ (1) − π ∗ (�K� + 1) − j∈K nj π ∗ (2) Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Proportional Response Enforcement Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Proportional Response Enforcement Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications

The heavy-handed enforcement mechanism treats each pair of firms Conclusions

independently as well as scaling punishments to the initial

transgression.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Proportional Response Enforcement Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications

The heavy-handed enforcement mechanism treats each pair of firms Conclusions

independently as well as scaling punishments to the initial

transgression.

For each pair of firms {i, j}, if firm i is entering or present in at least
one of firm j’s markets, and firms i and j are not entering or present
in an equal number of each others markets, then the firm in the
fewest of its rival’s contests enters additional contests sufficient to
equalise cross participation.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Proportional Response Enforcement Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications

The heavy-handed enforcement mechanism treats each pair of firms Conclusions

independently as well as scaling punishments to the initial

transgression.

For each pair of firms {i, j}, if firm i is entering or present in at least
one of firm j’s markets, and firms i and j are not entering or present
in an equal number of each others markets, then the firm in the
fewest of its rival’s contests enters additional contests sufficient to
equalise cross participation.

Otherwise firms i and j withdraw from every market belonging to

the other player. Collusion at
the Extensive
Margin

Monday, 10 May 2010

Monday, 10 May 2010
 Initial Deviation (t = 1)
Firm 1 Firm 2

Contested

Firm 3

Monday, 10 May 2010

 Initial Deviation (t = 1)
Firm 1 Firm 2

Contested

Firm 3

Monday, 10 May 2010

 Tit-for-Tat Response (t = 2)
Firm 1 Firm 2

Contested

Firm 3

Monday, 10 May 2010

 Tit-for-Tat Response (t = 2)
Firm 1 Firm 2

E Contested

Firm 3

Monday, 10 May 2010

 Tit-for-Tat Response (t = 2)

Firm 1 Firm 2 Firm 3

Monday, 10 May 2010

 Tit-for-Tat Response (t = 2)

Firm 1 Firm 2 Firm 3

Gain in Period 2 π ∗ (2)

Loss in Period 2 π ∗ (1) − π ∗ (2)

Monday, 10 May 2010

 Withdrawal (t = 3)
Firm 1 Firm 2

w Contested

Firm 3

Monday, 10 May 2010

 Tit-for-Tat Response (t = 2)

Firm 1 Firm 2 Firm 3

Gain in Period 2 π ∗ (2)

Loss in Period 2 π ∗ (1) − π ∗ (2)

Monday, 10 May 2010

 Tit-for-Tat Response (t = 2)

Firm 1 Firm 2 Firm 3

Gain in Period 2 π ∗ (2)

Loss in Period 2 π ∗ (1) − π ∗ (2)

Gain in Period 3 π ∗ (2) π ∗ (2)

Monday, 10 May 2010

 Tit-for-Tat Response (t = 2)

Firm 1 Firm 2 Firm 3

Gain in Period 2 π ∗ (2)

Loss in Period 2 π ∗ (1) − π ∗ (2)

Gain in Period 3 π ∗ (2) π ∗ (2)

Loss in Period 3 π ∗ (1) − π ∗ (2) π ∗ (1) − π ∗ (2)

Monday, 10 May 2010

 Equilibrium Path (t > 3)
Firm 1 Firm 2

Contested

Firm 3

Monday, 10 May 2010

 Introduction
The Model

Stability Conditions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Stability Conditions Collusive Equilibria

Uncertainty
Stability
Antitrust
The worst case deviation occurs where the firm with the fewest Implications
markets deviates by entering all markets belonging to a subset of rival Conclusions
firms.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Stability Conditions Collusive Equilibria

Uncertainty
Stability
Antitrust
The worst case deviation occurs where the firm with the fewest Implications
markets deviates by entering all markets belonging to a subset of rival Conclusions
firms.

There exists a δ ∈ (0,1) such that the partition Q can be supported

by multilateral enforcement if and only if for all i ∈ I and K ⊆ I \{i},

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Stability Conditions Collusive Equilibria

Uncertainty
Stability
Antitrust
The worst case deviation occurs where the firm with the fewest Implications
markets deviates by entering all markets belonging to a subset of rival Conclusions
firms.

There exists a δ ∈ (0,1) such that the partition Q can be supported

by multilateral enforcement if and only if for all i ∈ I and K ⊆ I \{i},

� 1 � ∗ �
∗ ∗
nj π (2) < ni π (1) − π (�K� + 1) .
2
j∈K

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Stability Conditions Collusive Equilibria

Uncertainty
Stability
Antitrust
The worst case deviation occurs where the firm with the fewest Implications
markets deviates by entering all markets belonging to a subset of rival Conclusions
firms.

There exists a δ ∈ (0,1) such that the partition Q can be supported

by multilateral enforcement if and only if for all i ∈ I and K ⊆ I \{i},

� 1 � ∗ �
∗ ∗
nj π (2) < ni π (1) − π (�K� + 1) .
2
j∈K

� � � ��
∗
PR
nj π (2)
j∈K
δ≥δ = max max � � �
i∈I K⊆I\{i} ni π (1) − π (�K� + 1) − j∈K nj π ∗ (2)
∗ ∗ Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Robustness Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Robustness Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

� � �
∗
n
j�=i j π (2)
δM L = max �
∗ ∗
� �
∗ (I)
i∈I ni π (1) − π (I) − n π
j�=i j

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Robustness Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

� � �
∗
n
j�=i j π (2)
δM L = max �
∗ ∗
� �
∗ (I)
i∈I ni π (1) − π (I) − n π
j�=i j

� � �
∗
n
j�=i j π (2)
δ HH = δ P R ≥ max �
∗ ∗
� �
∗ (2)
i∈I ni π (1) − π (I) − n π
j�=i j

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Uncertainty and Tit-for-Tat Enforcement Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Uncertainty and Tit-for-Tat Enforcement Collusive Equilibria

Uncertainty
Stability
Antitrust
Suppose that with some small probability the state is mis-reported Implications
following the transition stage. Suppose further that the mis-reported Conclusions
signal is commonly observed and that firms condition their play on
the observed signal even when they know it to be false.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Uncertainty and Tit-for-Tat Enforcement Collusive Equilibria

Uncertainty
Stability
Antitrust
Suppose that with some small probability the state is mis-reported Implications
following the transition stage. Suppose further that the mis-reported Conclusions
signal is commonly observed and that firms condition their play on
the observed signal even when they know it to be false.

The expected cost to firms of a false signal is highest under

multilateral enforcement and lowest under proportional response
enforcement. It follows that proportional response enforcement is
payoff dominant.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Uncertainty and Tit-for-Tat Enforcement Collusive Equilibria

Uncertainty
Stability
Antitrust
Suppose that with some small probability the state is mis-reported Implications
following the transition stage. Suppose further that the mis-reported Conclusions
signal is commonly observed and that firms condition their play on
the observed signal even when they know it to be false.

The expected cost to firms of a false signal is highest under

multilateral enforcement and lowest under proportional response
enforcement. It follows that proportional response enforcement is
payoff dominant.

Nevertheless, multilateral enforcement may be stable where

proportional response enforcement is not.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Uncertainty and Tit-for-Tat Enforcement Collusive Equilibria

Uncertainty
Stability
Antitrust
Suppose that with some small probability the state is mis-reported Implications
following the transition stage. Suppose further that the mis-reported Conclusions
signal is commonly observed and that firms condition their play on
the observed signal even when they know it to be false.

The expected cost to firms of a false signal is highest under

multilateral enforcement and lowest under proportional response
enforcement. It follows that proportional response enforcement is
payoff dominant.

Nevertheless, multilateral enforcement may be stable where

proportional response enforcement is not.

Collusion at
(Caveat: It is possible to design perverse systems of uncertainty the Extensive
where these results do not hold.) Margin

Monday, 10 May 2010

 Introduction
The Model

Stability Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Stability Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Uncertainty may be less of a factor at the extensive margin as

participation decisions are often easier to verify than strategic actions
within a market.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Stability Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Uncertainty may be less of a factor at the extensive margin as

participation decisions are often easier to verify than strategic actions
within a market.

Markov perfect collusion may survive changes in firm management or

ownership that have the effect of erasing the history of the game.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Stability Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Uncertainty may be less of a factor at the extensive margin as

participation decisions are often easier to verify than strategic actions
within a market.

Markov perfect collusion may survive changes in firm management or

ownership that have the effect of erasing the history of the game.

Collusion at the extensive margin can be facilitated by a smaller

group of agents than multi-market collusion.
Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Management Complicity in Multi-Market Collusion

Monday, 10 May 2010

 Management Complicity in Multi-Market Collusion

Firm Level

Monday, 10 May 2010

 Management Complicity in Multi-Market Collusion

Firm Level

Vic Tas Qld NT

WA NSW SA

Monday, 10 May 2010

 Management Complicity in Extensive Margin
Collusion

Firm Level

WA NSW SA

Monday, 10 May 2010

 Management Complicity in Extensive Margin
Collusion

Firm Level

WA NSW SA

Monopoly Monopoly

Monday, 10 May 2010

 Management Complicity in Extensive Margin
Collusion

Firm Level

WA NSW SA

Monopoly Competitive Monopoly

Monday, 10 May 2010

 Introduction
The Model

Detecting Collusion Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Detecting Collusion Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions
Collusion at the extensive margin is an act of omission.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Detecting Collusion Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions
Collusion at the extensive margin is an act of omission.

Is the firm capable of contesting the market?

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Detecting Collusion Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions
Collusion at the extensive margin is an act of omission.

Is the firm capable of contesting the market?

Would contesting the market be profitable?

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Detecting Collusion Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions
Collusion at the extensive margin is an act of omission.

Is the firm capable of contesting the market?

Would contesting the market be profitable?

Collusion at the extensive margin does not necessarily imply

cooperation between firms. This model can be interpreted as a
model of standoffs (such as the cold war).

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Detecting Collusion Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions
Collusion at the extensive margin is an act of omission.

Is the firm capable of contesting the market?

Would contesting the market be profitable?

Collusion at the extensive margin does not necessarily imply

cooperation between firms. This model can be interpreted as a
model of standoffs (such as the cold war).

Collusion may occur in places we would not usually think to look. Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Beer or Soft Drink Market

Monday, 10 May 2010

 Beer or Soft Drink Market

Retail Sales

Monday, 10 May 2010

 Beer or Soft Drink Market

Restaurant Chain A

Restaurant Chain B

Retail Sales

Restaurant Chain C

Monday, 10 May 2010

 Beer or Soft Drink Market

Restaurant Chain A

Restaurant Chain B
Bar A

Retail Sales
Bar B

Restaurant Chain C

Monday, 10 May 2010

 Beer or Soft Drink Market

Restaurant Chain A

Restaurant Chain B
Bar A

Retail Sales
Bar B

Sports Ground

Restaurant Chain C
Entertainment Venue

Monday, 10 May 2010

 Beer or Soft Drink Market

Vending Machine Location B

Vending Machine Location C

Restaurant Chain A

Restaurant Chain B
Bar A

Retail Sales
Bar B
Vending Machine Location A

Sports Ground

Restaurant Chain C
Entertainment Venue

Monday, 10 May 2010

 Beer or Soft Drink Market

Vending Machine Location B

Convenience Store A

Vending Machine Location C

Restaurant Chain A

Restaurant Chain B
Bar A

Retail Sales
Bar B
Convenience Store B Vending Machine Location A

Sports Ground

Restaurant Chain C
Entertainment Venue

Monday, 10 May 2010

 Collusive Fringe
Firm 1 Firm 2

Convenience Store A Vending Machine Location B

Vending Machine Location C

Restaurant Chain A
Contested

Bar A Restaurant Chain B

Bar B Retail Sales
Convenience Store B
Vending Machine Location A

Sports Ground Restaurant Chain C

Entertainment Venue
Monday, 10 May 2010
 Introduction

Google and the Partitioning of Product The Model

Collusive Equilibria
Markets Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction

Google and the Partitioning of Product The Model

Collusive Equilibria
Markets Uncertainty
Stability
Antitrust
Implications
Conclusions
Google has achieved a dominant position in search based advertising.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction

Google and the Partitioning of Product The Model

Collusive Equilibria
Markets Uncertainty
Stability
Antitrust
Implications
Conclusions
Google has achieved a dominant position in search based advertising.

Attempts by Google expand its product range have resulted in rival

firms entering (or expanding their presence within) Google’s core
market.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction

Google and the Partitioning of Product The Model

Collusive Equilibria
Markets Uncertainty
Stability
Antitrust
Implications
Conclusions
Google has achieved a dominant position in search based advertising.

Attempts by Google expand its product range have resulted in rival

firms entering (or expanding their presence within) Google’s core
market.

Google’s entry into office applications and operating systems was

followed by Microsoft’s development of the Bing search engine.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction

Google and the Partitioning of Product The Model

Collusive Equilibria
Markets Uncertainty
Stability
Antitrust
Implications
Conclusions
Google has achieved a dominant position in search based advertising.

Attempts by Google expand its product range have resulted in rival

firms entering (or expanding their presence within) Google’s core
market.

Google’s entry into office applications and operating systems was

followed by Microsoft’s development of the Bing search engine.

Entry into the mobile device space was followed by Apple’s

acquisition of Quattro Wireless.
Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction

Google and the Partitioning of Product The Model

Collusive Equilibria
Markets Uncertainty
Stability
Antitrust
Implications
Conclusions
Google has achieved a dominant position in search based advertising.

Attempts by Google expand its product range have resulted in rival

firms entering (or expanding their presence within) Google’s core
market.

Google’s entry into office applications and operating systems was

followed by Microsoft’s development of the Bing search engine.

Entry into the mobile device space was followed by Apple’s

acquisition of Quattro Wireless.
Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Predatory Entry Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Predatory Entry Collusive Equilibria

Uncertainty
Stability
Antitrust
Suppose that the expansion incentive did not hold. Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Predatory Entry Collusive Equilibria

Uncertainty
Stability
Antitrust
Suppose that the expansion incentive did not hold. Implications
Conclusions

For example, one or more markets is a natural monopoly

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Predatory Entry Collusive Equilibria

Uncertainty
Stability
Antitrust
Suppose that the expansion incentive did not hold. Implications
Conclusions

For example, one or more markets is a natural monopoly

Grim strategy enforcement is ineffective.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Predatory Entry Collusive Equilibria

Uncertainty
Stability
Antitrust
Suppose that the expansion incentive did not hold. Implications
Conclusions

For example, one or more markets is a natural monopoly

Grim strategy enforcement is ineffective.

Suppose Firm 1 has the natural monopoly market while Firm 2 has
the duopoly market.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Predatory Entry Collusive Equilibria

Uncertainty
Stability
Antitrust
Suppose that the expansion incentive did not hold. Implications
Conclusions

For example, one or more markets is a natural monopoly

Grim strategy enforcement is ineffective.

Suppose Firm 1 has the natural monopoly market while Firm 2 has
the duopoly market.

If Firm 1 enters 2’s market, Firm 2 will need to use a temporary

punishment. That punishment implies price below cost.

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Predatory Entry Collusive Equilibria

Uncertainty
Stability
Antitrust
Suppose that the expansion incentive did not hold. Implications
Conclusions

For example, one or more markets is a natural monopoly

Grim strategy enforcement is ineffective.

Suppose Firm 1 has the natural monopoly market while Firm 2 has
the duopoly market.

If Firm 1 enters 2’s market, Firm 2 will need to use a temporary

punishment. That punishment implies price below cost.

Thus, enforcement requires predatory entry to induce exit from Collusion at

the Extensive
another market. Margin

Monday, 10 May 2010

 Introduction
The Model

Mergers Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Mergers Collusive Equilibria

Uncertainty
Stability
Mergers when firms are colluding at the intensive margin can increase cartel Antitrust
stability Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Mergers Collusive Equilibria

Uncertainty
Stability
Mergers when firms are colluding at the intensive margin can increase cartel Antitrust
stability Implications
Conclusions
Mergers when firms are colluding at the extensive margin has an ambiguous
effect on cartel stability

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Mergers Collusive Equilibria

Uncertainty
Stability
Mergers when firms are colluding at the intensive margin can increase cartel Antitrust
stability Implications
Conclusions
Mergers when firms are colluding at the extensive margin has an ambiguous
effect on cartel stability

Case 1: Initially symmetric firms; merger reduces cartel stability

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Mergers Collusive Equilibria

Uncertainty
Stability
Mergers when firms are colluding at the intensive margin can increase cartel Antitrust
stability Implications
Conclusions
Mergers when firms are colluding at the extensive margin has an ambiguous
effect on cartel stability

Case 1: Initially symmetric firms; merger reduces cartel stability

Merger has no effect on collusive profits or the incentive to deviate

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Mergers Collusive Equilibria

Uncertainty
Stability
Mergers when firms are colluding at the intensive margin can increase cartel Antitrust
stability Implications
Conclusions
Mergers when firms are colluding at the extensive margin has an ambiguous
effect on cartel stability

Case 1: Initially symmetric firms; merger reduces cartel stability

Merger has no effect on collusive profits or the incentive to deviate
Merger increases profits when there is multi-lateral entry

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Mergers Collusive Equilibria

Uncertainty
Stability
Mergers when firms are colluding at the intensive margin can increase cartel Antitrust
stability Implications
Conclusions
Mergers when firms are colluding at the extensive margin has an ambiguous
effect on cartel stability

Case 1: Initially symmetric firms; merger reduces cartel stability

Merger has no effect on collusive profits or the incentive to deviate
Merger increases profits when there is multi-lateral entry

Case 2: Merger between two smallest firms can increase cartel stability

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Mergers Collusive Equilibria

Uncertainty
Stability
Mergers when firms are colluding at the intensive margin can increase cartel Antitrust
stability Implications
Conclusions
Mergers when firms are colluding at the extensive margin has an ambiguous
effect on cartel stability

Case 1: Initially symmetric firms; merger reduces cartel stability

Merger has no effect on collusive profits or the incentive to deviate
Merger increases profits when there is multi-lateral entry

Case 2: Merger between two smallest firms can increase cartel stability
Merger increases stake in collusion and reduces incentive to deviate

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Mergers Collusive Equilibria

Uncertainty
Stability
Mergers when firms are colluding at the intensive margin can increase cartel Antitrust
stability Implications
Conclusions
Mergers when firms are colluding at the extensive margin has an ambiguous
effect on cartel stability

Case 1: Initially symmetric firms; merger reduces cartel stability

Merger has no effect on collusive profits or the incentive to deviate
Merger increases profits when there is multi-lateral entry

Case 2: Merger between two smallest firms can increase cartel stability
Merger increases stake in collusion and reduces incentive to deviate
but ... still increases profits when there is multi-lateral entry

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Mergers Collusive Equilibria

Uncertainty
Stability
Mergers when firms are colluding at the intensive margin can increase cartel Antitrust
stability Implications
Conclusions
Mergers when firms are colluding at the extensive margin has an ambiguous
effect on cartel stability

Case 1: Initially symmetric firms; merger reduces cartel stability

Merger has no effect on collusive profits or the incentive to deviate
Merger increases profits when there is multi-lateral entry

Case 2: Merger between two smallest firms can increase cartel stability
Merger increases stake in collusion and reduces incentive to deviate
but ... still increases profits when there is multi-lateral entry

In general, balance between the fact that the reduction in firm numbers reduces Collusion at
the severity of punishments that can be put in place against the reduction in the the Extensive
Margin
incentive to deviate that comes from consolidation.
Monday, 10 May 2010
 Introduction
The Model

Conclusions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Conclusions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Examines collusion at the extensive margin Conclusions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Conclusions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Examines collusion at the extensive margin Conclusions

Distinct predictions for multi-market contact

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Conclusions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Examines collusion at the extensive margin Conclusions

Distinct predictions for multi-market contact

Rationale for proportionate response

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Conclusions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Examines collusion at the extensive margin Conclusions

Distinct predictions for multi-market contact

Rationale for proportionate response
Oligopoly with a collusive fringe

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Conclusions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Examines collusion at the extensive margin Conclusions

Distinct predictions for multi-market contact

Rationale for proportionate response
Oligopoly with a collusive fringe
Predatory entry

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Conclusions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Examines collusion at the extensive margin Conclusions

Distinct predictions for multi-market contact

Rationale for proportionate response
Oligopoly with a collusive fringe
Predatory entry
Ease of detection

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Conclusions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Examines collusion at the extensive margin Conclusions

Distinct predictions for multi-market contact

Rationale for proportionate response
Oligopoly with a collusive fringe
Predatory entry
Ease of detection

Future directions

Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Conclusions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Examines collusion at the extensive margin Conclusions

Distinct predictions for multi-market contact

Rationale for proportionate response
Oligopoly with a collusive fringe
Predatory entry
Ease of detection

Future directions
Relational contracting
Collusion at
the Extensive
Margin

Monday, 10 May 2010

 Introduction
The Model

Conclusions Collusive Equilibria

Uncertainty
Stability
Antitrust
Implications
Examines collusion at the extensive margin Conclusions

Distinct predictions for multi-market contact

Rationale for proportionate response
Oligopoly with a collusive fringe
Predatory entry
Ease of detection

Future directions
Relational contracting
Trade agreements Collusion at
the Extensive
Margin

Monday, 10 May 2010