Practices leading to tacit collusion

Price visibility can either promote competition, or promote tacit collusion

Promote competition
- Consumers observe all prices and make more informed decisions
- Firms can competitively adjust to price changes more easily
Promote tacit collusion
- Firms observe all other firms’ prices
- Visible prices make it easier to see if another firm is cheating the collusive agreement

Price preannouncements could lead to tacit collusion
- Suppose firms are supplying in a way that maximizes their joint profits
- Futher suppose there is a change in the market (i.e. demand, or costs change)
- Collusive firms announce how they will adjust their prices, thus colluders are aware and can adjust accordingly
- A firm can match the announced price to show agreement with the price change, or announce a different price to show disagreement
However, there are benefits to price preannouncements
- Preannouncements help vendors submit bids (i.e. construction companies)
- Eliminating preannouncements makes bidding much more difficult

Precommitment strategies help mitigate the incentive for colluding firms to cheat their agreement
- These strategies can promote competition, or promote tacit collusion
A most favored customer (MFC) clause guarantees that a certain customer will never pay anything but the lowest rate charged by the firm
- MFC acts as a price ceiling, which is good for consumer welfare
  
  “Buy today. If we charge a lower price within the next 6 months, we will refund the difference to you.”
- A firm who offers an MFC signals that they will not cheat a collusion price
A meet the competition clause states that a firm is always willing to match prices offered by competitors on any future sale
- These clauses ensure that all attempts to undercut the collusive price will be matched, thus eliminating any potential profits from cheating the collusive agreement

Price leadership can also facilitate collusive behavior
1. Dominant firm price leadership
2. Low cost price leadership
3. Barometric price leadership
4. Collusive price leadership
In general, these methods are hard to distinguish
- Antitrust authorities must be very careful when convicting collusive behavior on the basis of price leadership

Dominant firm price leadership can be thought of using our dominant firm model
- A dominant firm observes the total demand of the industry and the presence of fringe suppliers
- The dominant firm chooses a profit maximizing price above the competitive level, and the competitive fringe follows
- The competitive fringe is now making profit
This is not necessarily collusive, just sound business practices

Low cost price leadership has an intuitive explanation
- Suppose firms are initially at a long-run competitive equilibrium
- Further suppose that a firm has found some new way to significantly cut its costs
- The low cost firm now sets a lower price, capture more of the market, and increase profit
- Other firms can match this lower price and experience temporary losses, while they scramble to find ways to reduce their costs
This is not anticompetitive, nor is it tacitly collusive

Barometric price leadership occurs when market participants believe that one firm is representative of the industry as a whole
- Other firms observe what the represenative firm is doing, and adjust their strategies accordingly
- If the representative firm serves as a good barometer of the industry, then all other firms will follow its lead
This is not necessarily anticompetitive

Collusive price leadership can be thought of as a tacit alternative to an explicit collusive agreement
- The assumptions of an oligopoly must be present (i.e. few firms, high entry barriers, homogeneous goods, etc.)
- One collusive firm will be “elected” as the price leader
- All other firms will match the price of the leader
- This allows them to tacitly agree on a cartel price
This is considered anticompetitive