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An Empirical Test of Monopoly Behaviour: An Application to the Hardwood Case.
Applied Economics
Abstract
The exchange of price information via formal trade associations has been viewed as an attempt by competitors to fix prices. Indeed, an early manifestation of this view was revealed in the Hardwood case. This article argues that the price association formed in the hardwood lumber industry was an attempt by producers to minimize the problem of costly information. Some empirical evidence is provided to show that the exchange had no anticompetitive impact on market output and price. The evidence also indicates that competitive behaviour described the lumber industry during this time period.
... Thus, if there is perfect competition, there is no output response since a single *Corresponding author. E-mail: nru@du.se 1 Examples of studies that use this method, or some variant of it, include Aiginger et al. (1995), Alexander (1988, Azzam and park (1993), Bo¨ckemBo¨ckem (2004), Hyde and Perloff (1998), and Shaffer (2002). firm cannot affect output at the industry level, whereas the response is one-to-one if there is no competition since the industry behaves as a single firm. ...
We examine if the Nordic power market, Nord Pool, has been competitive or if electricity suppliers have had market power. Specifically, since the evolution from national markets to a multi-national and largely deregulated power market has taken place stepwise, we also examine how the degree of market power has evolved during this integration process. The Bresnahan–Lau method together with weekly data during 1996–2004 are used in the analysis, which shows that electricity suppliers have had small, but statistically significant, market power, but that the market power has been reduced as the Nord Pool area has expanded.
This paper surveys hundreds of published social-science studies of private, hard-core cartels that contain 699 observations of long-run overcharges. The primary finding is that the median cartel overcharge for all types of cartels over all time periods is 25%: 19% for domestic cartels, 32% for international cartels, and 31% for all successful cartels. Thus, international cartels have historically been about 68% more effective in raising prices than domestic cartels. Cartel overcharges are skewed to the high side, pushing the mean overcharge for all types of cartels over all time periods to 42%. "Peak" cartel overcharges are typically double those of the long-run averages. These results are generally consistent with the few, more limited, previously published works that survey cartel overcharges. There is no evidence that convicted cartels are markedly less effective than unpunished ones. The results of a second survey of final verdicts in decided U.S. horizontal collusion cases, only three of which were international cartels, show an average median overcharge of 21% and an average mean overcharge of 30%. Outside the United States, 62 decisions of competition commissions cited median average overcharges of 25% and a mean of 47%. There are three significant policy implications. First, there is a view among some antitrust writers that there is little evidence that cartels raise prices significantly for a period long enough to justify the height of current U.S. cartel penalties. This survey's results, which are based upon an extraordinarily large amount of data spanning a broad swath of history of all types of private cartels, sharply contradict these views. In fact, the data suggest that U.S. penalties ought to be increased. Mean overcharges are three times as high as the level presumed by the U.S. Sentencing Commission. Surprisingly, bid rigging was no more injurious than other forms of collusion, which suggests that the USSC should amend its Guidelines that currently treat bid rigging more harshly than other forms of collusion. Second, the principal antitrust authorities abroad often base their typical or maximum fines on a 10% harm presumption. Average fines imposed since 1995 by Canada and the EU on identical cartels have been lower than U.S. government fines, yet overcharges generated by cartels discovered outside the United States are higher than North America-centered cartels. Consequently, anticartel laws and fine-setting practices abroad are in even greater need of strengthening. Third, cartels with multi-continental price effects are the most harmful type. Despite the evident increases in cartel detection rates and the size of monetary fines and penalties in the past decade, a good case can be made that current global anticartel regimes are under-deterring. While the recent worldwide trend towards the intensification of cartel penalties has been desirable, global cartels are more difficult to detect, have less fear from entry of rivals, achieve higher levels of sales and profitability, and systematically receive weaker corporate sanctions than comparable domestic cartels. Antitrust sanctions worldwide should be higher for global cartels than for other types.
Many jurisdictions fine illegal cartels using penalty guidelines that presume an arbitrary 10% overcharge. This article surveys more than 700 published economic studies and judicial decisions that contain 2,041 quantitative estimates of overcharges of hard-core cartels. The primary findings are: (1) the median average long-run overcharge for all types of cartels over all time periods is 23.0%; (2) the mean average is at least 49%; (3) overcharges reached their zenith in 1891-1945 and have trended downward ever since; (4) 6% of the cartel episodes are zero; (5) median overcharges of international- membership cartels are 38% higher than those of domestic cartels; (6) convicted cartels are on average 19% more effective at raising prices as unpunished cartels; (7) bid-rigging conduct displays 25% lower markups than price-fixing cartels; (8) contemporary cartels targeted by class actions have higher overcharges; and (9) when cartels operate at peak effectiveness, price changes are 60-80% higher than the whole episode. Historical penalty guidelines aimed at optimally deterring cartels are likely to be too low.
This article examines the level of competition that prevails in the Malaysian poultry markets by using the new empirical industrial organization methodology. We follow the Bresnahan (1982) and Lau (1982) oligopoly model, which allows the identification of market power using aggregated time-series data. The methodology involves the estimation of demand and supply equations for the identification of the parameters measuring the degree of market power. This study uses annual data from 1980-2010 to estimate the demand and supply equations of the poultry market in Malaysia. The estimation results show that the demand for chicken meat is inelastic (−0.124), indicating that consumers are not sensitive to price change. On the other hand, income is elastic at 3.636, implying that poultry meat is a luxury. The cross-price elasticity with respect to beef is −2.405, rejecting beef as a substitute to chicken meat in Malaysia. The coefficient of conduct parameters for the three subperiods of 1980-1990, 1991-2004, and 2005-2010 measuring market power are 0.6740, 0.5540, and 0.5790, respectively. The results indicate imperfect competitive market in the poultry industry as more farmers opt to join poultry integrators.
One of the most contentious debates in modern telecommunications policy regards whether or not a regulatory mandated reductions in the per-minute costs of long distance carriers - access charges domestically and settlement rates internationally - are fully reflected in the per-minute prices for long distance calls. In this paper, we evaluate the flow through of settlement costs to international long distance prices and find strong evidence that IMTS prices are closely related to settlement costs, and that these prices fully reflect differences in settlement costs. Further, the estimated relationship between prices and settlement cost indicates, under certain assumptions, that the IMTS industry is very competitive.
Studies of the relationship between market structure and market power continue to account for a large segment of the literature. The traditional structure-conduct-performance approach of analysing this issue has been criticized because of its lack of attention to industry-specific characteristic. Adopting an approach which focuses on a single industry, we use data on the US steel industry to analyse the effects of several mergers on the steel market power. Although our results show that market power in the steel industry has been falling in recent years, it does appear that two recent mergers did boost market power.
We examine if the Nordic power market, Nord Pool, has been competitive or if electricity suppliers have had market power. Specifically, since the evolution from national markets to a multi-national and largely deregulated power market has taken place stepwise, we also examine how the degree of market power has evolved during this integration process. The Bresnahan-Lau method together with weekly data during 1996-2004 are used in the analysis, which shows that electricity suppliers have had small, but statistically significant, market power, but that the market power has been reduced as the Nord Pool area has expanded
Up to six months ahead of actual production, U.S. automakers announce plans for their monthly domestic production of cars. A leading industry trade journal publishes the initial plan and then a series of revisions leading up to the month in question. We analyze a panel data set spanning the years 1965-1995, matching the production forecasts with data for actual monthly production. We show that a firm's plan announcement affects competitors' later revisions of their own plans and eventual production. The interaction appears to be complementary--large plans or upward revisions cause competitors to revise plans upward and increase production. The results are consistent with models in which firms share information about common demand parameters.
This paper tests for switching market conduct in an oligopsonistic industry. The model adopts Bresnahan's procedure for identifying the oligopoly solution and integrates the procedure with a switching regression model. Applied to the US beef slaughter industry, two distinct regimes of conduct in the industry were identified. The two regimes are consistent with the time periods during which the industry has undergone major structural change.
A recent article in this journal, Alexander (1988), tests whether the exchange of price information in the 1921 Hardwood case was a means of fixing prices or a way of coping with costly information. Alexander makes two serious errors. Both errors involve the incorrect use of a technique used to measure price-cost margins to determine the extent to which an industry is monopolistic, competitive, or somewhere in between. I reestimate Alexander's model correcting his two errors. In addition, I improve his data set. Alexander's conclusion that the price association was pro-competitive, although drawn incorrectly, is shown to be correct.
This paper surveys published economic studies and judicial decisions that contain 1,040 quantitative estimates of overcharges of hard-core cartels. The primary finding is that the median long-run overcharge for all types of cartels over all time periods is 25.0%:18.8% for domestic cartels and 31.0% for international cartels. Cartel overcharges are positively skewed, pushing the mean overcharge for all successful cartels to 43.4%. Convicted cartels are on average as equally effective at raising prices as unpunished cartels, but bid-rigging conduct does display somewhat lower mark-ups than price-fixing cartels. These findings suggest that optimal deterrence requires that monetary penalties ought to be increased.
Oligopoly theory predicts that market price will be at least as high as the competitive price and no higher than the monopoly price. Particular oligopoly solution concepts offer more exact predictions, but it is difficult to know which solution concept holds in any real market. This paper shows that the oligopoly solution concept can be estimated econometrically.
An earlier version appeared in the form of a doctoral dissertation at Harvard University in 1958 Incluye bibliografía e índice
Two steps are required for firms collusively to restrict output in stochastic markets. Firms must homogenize their market estimates by pooling information and they must cooperatively allocate production levels. In this article I examine the incentives for firms to share private information about a stochastic market. I show that there is never a mutual incentive for all firms in an industry to share unless they may cooperate on strategy once information has been shared. This situation is unfortunate, as society's welfare is maximized only when firms share information, but act competitively.
We consider an oligopolistic market where firms face an uncertain demand for their product. Each firm observes a private signal for the state of demand and decides whether to reveal it to other firms and how complete this revelation will be. After the stage of information transmission the firm chooses its level of output. We derive pure strategy equilibria that are symmetric and subgame perfect, and demonstrate that no information sharing is the unique Nash equilibrium of the game regardless of the degree of correlation among the private signals.
When do oligopolists gain by sharing their private information about their costs with one another? What are the social welfare
effects of such information exchange? I study these questions by comparing the oligopolists' expected profits under a cost
sharing agreement with their expected profits in the Bayesian equilibrium that would arise without cost sharing. I also analyse
the firms' decisions to form a trade association to share their cost data.
Under conditions of linear demand and Cournot behaviour, industrywide information exchange is the unique point in the core
of the trade association membership game. The exchange of cost data increases expected profits and welfare, but reduces expected
consumer surplus. Cost sharing increases efficiency by raising the market shares of lower cost firms and reducing the variability
of aggregate output. Consumer surplus is diminished, however, because the variance of output is reduced, and consumer surplus
is a convex function of output.
We examine how incentives for two duopolists to honestly share information change depending upon the nature of competition
(Cournot or Bertrand) and the nature of the information structure. While in earlier papers uncertainty is about an unknown
common demand intercept, in the present paper uncertainty is about unknown private costs. The different information structure
reverses the incentives to share information. While with unknown common demand sharing is a dominant strategy with Bertrand
competition and concealing is a dominant strategy with Cournot competition, with unknown private costs sharing is a dominant
strategy with Cournot competition and concealing is a dominant strategy with Bertrand competition.
The price problem in the lumber industry Bureau of the Census (1908) Manufactures, Part 111 The Lumber Industry, Part I, Standing Timber. US Government Printing Office Information, entry, and welfare: The case for collusion
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Compton, Wilson (1917) The price problem in the lumber industry. American Economic Review, 7, 582-97. Department of Commerce and Labour, Bureau of the Census (1908) Manufactures, Part 111, Special Reports on Selected Industries. US Government Printing Office, Washington, D.C. Department of Commerce and Labour, Bureau of Corporations (1913) The Lumber Industry, Part I, Standing Timber. US Government Printing Office, Washington, D.C. Dewey, Donald (1979) Information, entry, and welfare: The case for collusion. American Economic Review, 69, 587-94.
Exchange of cost information in oligopoly Review of Economic Studies, 53, 43346. Stephens, George A. (1917) Determinants of lumber prices
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Shapiro, Car1 (1986) Exchange of cost information in oligopoly. Review of Economic Studies, 53, 43346. Stephens, George A. (1917) Determinants of lumber prices. American Economic Review, 7, 289-305.
Unionism and Relative Wages in the United States. The University of Chicago Press, Chicago, Illinois. Phillips, Almarin (1962) Market Structure, Organization, and Performance Econometric Models and Economic Forecasts
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Lewis, H. G. (1963) Unionism and Relative Wages in the United States. The University of Chicago Press, Chicago, Illinois. Phillips, Almarin (1962) Market Structure, Organization, and Performance. Harvard University Press, Cambridge, Massachusetts. Pindyck, Robert S., and Rubinfeld, Daniel L. (1976) Econometric Models and Economic Forecasts, McGraw-Hill Book Company, New York.
Welfare and collusion: Reply
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Dewey, Donald (1982) Welfare and collusion: Reply. American Economic Review, 72, 276-81.