This document discusses how the length of long-term contracts affects the possibility of collusion between firms in a market. It makes two key points:
1) Longer-term contracts can both help and hinder collusion. They reduce the immediate gain from deviating from collusive pricing but also reduce the severity of punishment afterwards by providing some insulation during the contracted periods.
2) As contract length increases, collusion becomes more difficult to sustain because the "protection effect" of insulating the deviating firm from punishment outweighs the "gain-cutting effect" of reducing the profits from deviation. However, firms can always sustain some collusive price above marginal cost if they sell the right amount of contracts, regardless
Based on my recent work with several co-authors this paper explores the relationship between discretion, reputation, competition and entry in procurement markets. I focus especially on public procurement, which is highly regulated for accountability and trade reasons. In Europe regulation constrains the use of past performance information to select contractors while in the US its use is encouraged. I present some novel evidence on the benefits of allowing buyers to use reputational indicators based on past performance and discuss the complementary roles of discretion and restricted competition in reinforcing relational/reputational forces, both in theory and in a new
empirical study on the effects restricted rather than open auctions. I conclude reporting preliminary results form a laboratory experiment showing that reputational mechanisms can be designed to stimulate rather than hindering new entry.
Many quality dimensions are hard to contract upon and are at risk of degradation when services are procured rather than produced in-house. However, procurement may foster performance-improving innovation. We assemble a large data set on elderly care services in Sweden between 1990 and 2009, including survival rates - our measure of non-contractible quality - and subjectively perceived quality of service. We estimate how procurement from private providers affects these measures using a difference-in-difference approach. The results indicate that procurement significantly increases non-contractible quality as measured by survival rate, reduces the cost per resident but does not affect subjectively perceived quality.
This article reports results from an experiment studying how fines, leniency and rewards for whistleblowers affect cartel formation and prices. Antitrust without leniency reduces cartel formation but increases cartel prices: subjects use costly fines as punishments. Leniency improves antitrust by strengthening deterrence but stabilizes surviving cartels: subjects appear to anticipate the lower post-conviction prices after reports/leniency. With rewards, prices fall at the competitive level. Overall our results suggest a strong cartel deterrence potential for well-run leniency and reward schemes. These findings may also be relevant for similar white-collar organized crimes, like corruption and fraud.
This paper estimates the impact of competition policy on total factor productivity growth for 22 industries in twelve OECD countries over 1995 to 2005. We find a positive and significant effect of competition policy as measured by created indexes. We provide results based on instrumental variables estimators and heterogeneous effects to support the causal nature of the established link. The effect is particularly strong for specific aspects of competition policy related to its institutional setup and antitrust activities. It is also strengthened by good legal systems, suggesting complementarities between competition policy and the efficiency of law enforcement institutions.
This paper reports results from a laboratory experiment exploring the relationship between reputation and entry in procurement. There is widespread concern among regulators that favoring suppliers with good past performance, a standard practice in private procurement, may hinder entry by new (smaller or foreign) firms in public procurement markets. Our results suggest that while some reputational mechanisms indeed reduce the frequency of entry, so that the concern is warranted, appropriately designed reputation mechanisms actually stimulate entry. Since quality increases but not prices, our data also suggest that the introduction of reputation may generate large welfare gains from the buyer.
In most jurisdictions, antitrust fines are based on affected commerce rather than on collusive profits, and in some others, caps on fines are introduced based on total firm sales rather than on affected commerce. We uncover a number of distortions that these policies generate, propose simple models to characterize their comparative static properties, and quantify them with simulations based on market data. We conclude by discussing the obvious need to depart from these distortive rules-of-thumb that appear to have the potential to substantially reduce social welfare.
In Grossman and Helpman’s (1994) canonical "Protection for Sale" (PFS) model political competition between industry lobbies is purely driven by their interests as consumers. This paper introduces demand linkages and oligopolistic competition into PFS framework to address the rivalry among lobbies due to product substitutability. It shows that increased substitutability weakens the interest groups’ incentives to lobby and reduces tariff distortions. This may explain why empirical tests of PFS find surprisingly little impact of lobbies on the government trade policy decision. The paper also analyzes endogenous lobby formation, suggesting that demand linkages may adversely affect industry decision to get organized.
by Elena Paltseva, forthcoming in Canadian Journal of Economics
We investigate the impact of procurement thresholds on strategic behavior of public buyers in Sweden. We document signs of “bunching” at the threshold, which suggests that strategic behavior in procurement is potentially important in Sweden, and should not be overlooked in the on-going public debate on the procurement thresholds. At the same time, data limitations do not allow us to access the impact of this strategic behavior on procurement outcomes and efficiency. This calls for better and more extensive procurement data collection.
Based on my recent work with several co-authors this paper explores the relationship between discretion, reputation, competition and entry in procurement markets. I focus especially on public procurement, which is highly regulated for accountability and trade reasons. In Europe regulation constrains the use of past performance information to select contractors while in the US its use is encouraged. I present some novel evidence on the benefits of allowing buyers to use reputational indicators based on past performance and discuss the complementary roles of discretion and restricted competition in reinforcing relational/reputational forces, both in theory and in a new
empirical study on the effects restricted rather than open auctions. I conclude reporting preliminary results form a laboratory experiment showing that reputational mechanisms can be designed to stimulate rather than hindering new entry.
Many quality dimensions are hard to contract upon and are at risk of degradation when services are procured rather than produced in-house. However, procurement may foster performance-improving innovation. We assemble a large data set on elderly care services in Sweden between 1990 and 2009, including survival rates - our measure of non-contractible quality - and subjectively perceived quality of service. We estimate how procurement from private providers affects these measures using a difference-in-difference approach. The results indicate that procurement significantly increases non-contractible quality as measured by survival rate, reduces the cost per resident but does not affect subjectively perceived quality.
This article reports results from an experiment studying how fines, leniency and rewards for whistleblowers affect cartel formation and prices. Antitrust without leniency reduces cartel formation but increases cartel prices: subjects use costly fines as punishments. Leniency improves antitrust by strengthening deterrence but stabilizes surviving cartels: subjects appear to anticipate the lower post-conviction prices after reports/leniency. With rewards, prices fall at the competitive level. Overall our results suggest a strong cartel deterrence potential for well-run leniency and reward schemes. These findings may also be relevant for similar white-collar organized crimes, like corruption and fraud.
This paper estimates the impact of competition policy on total factor productivity growth for 22 industries in twelve OECD countries over 1995 to 2005. We find a positive and significant effect of competition policy as measured by created indexes. We provide results based on instrumental variables estimators and heterogeneous effects to support the causal nature of the established link. The effect is particularly strong for specific aspects of competition policy related to its institutional setup and antitrust activities. It is also strengthened by good legal systems, suggesting complementarities between competition policy and the efficiency of law enforcement institutions.
This paper reports results from a laboratory experiment exploring the relationship between reputation and entry in procurement. There is widespread concern among regulators that favoring suppliers with good past performance, a standard practice in private procurement, may hinder entry by new (smaller or foreign) firms in public procurement markets. Our results suggest that while some reputational mechanisms indeed reduce the frequency of entry, so that the concern is warranted, appropriately designed reputation mechanisms actually stimulate entry. Since quality increases but not prices, our data also suggest that the introduction of reputation may generate large welfare gains from the buyer.
In most jurisdictions, antitrust fines are based on affected commerce rather than on collusive profits, and in some others, caps on fines are introduced based on total firm sales rather than on affected commerce. We uncover a number of distortions that these policies generate, propose simple models to characterize their comparative static properties, and quantify them with simulations based on market data. We conclude by discussing the obvious need to depart from these distortive rules-of-thumb that appear to have the potential to substantially reduce social welfare.
In Grossman and Helpman’s (1994) canonical "Protection for Sale" (PFS) model political competition between industry lobbies is purely driven by their interests as consumers. This paper introduces demand linkages and oligopolistic competition into PFS framework to address the rivalry among lobbies due to product substitutability. It shows that increased substitutability weakens the interest groups’ incentives to lobby and reduces tariff distortions. This may explain why empirical tests of PFS find surprisingly little impact of lobbies on the government trade policy decision. The paper also analyzes endogenous lobby formation, suggesting that demand linkages may adversely affect industry decision to get organized.
by Elena Paltseva, forthcoming in Canadian Journal of Economics
We investigate the impact of procurement thresholds on strategic behavior of public buyers in Sweden. We document signs of “bunching” at the threshold, which suggests that strategic behavior in procurement is potentially important in Sweden, and should not be overlooked in the on-going public debate on the procurement thresholds. At the same time, data limitations do not allow us to access the impact of this strategic behavior on procurement outcomes and efficiency. This calls for better and more extensive procurement data collection.
This paper reports results from an experiment studying how fines, leniency programs and reward schemes for whistleblowers affect cartel formation and prices. Antitrust without leniency reduces cartel formation, but increases cartel prices: subjects use costly fines as (altruistic) punishments. Leniency further increases deterrence, but stabilizes surviving cartels: subjects appear to anticipate harsher times after defections as leniency reduces recidivism and lowers post-conviction prices. With rewards, cartels are reported systematically and prices finally fall. If a ringleader is excluded from leniency, deterrence is unaffected but prices grow. Differences between treatments in Stockholm and Rome suggest culture may affect optimal law enforcement.
The EU Leniency Programme (LP) aims to encourage the dissolution of existing cartels and the deterrence of future cartels, through spontaneous reporting and/or significant cooperation by cartel members during an investigation. However, the European Commission guidelines are rather vague in terms of the factors that influence the granting and scale of fine reductions. As expected, the results shown that the first reporting or cooperating firm receives generous fine reductions. More importantly, there is some evidence that firms can “learn how to play the leniency game”, either learning how to cheat or how to report, as the reductions given to multiple oenders (and their cartel partners) are substantially higher. These results have an ambiguous impact on firms’ incentives and major implications for policy making.
By Catarina Marvao, SITE Working Paper.
This document discusses Most Favoured Nation (MFN) clauses, which originated in international trade agreements. It describes the potential pro-competitive and anti-competitive effects of MFN clauses, noting they can limit price discrimination and transaction costs but may also reduce incentives to lower prices. The assessment of MFN clauses is fact-specific and dependent on the market position of parties and characteristics of the market. Recent EU cases involving MFN clauses in the hotel and e-books sectors are also mentioned.
1. robust exclusion and market division through loyalty discountsMatias González Muñoz
This document summarizes research on the effects of loyalty discounts in markets. It finds that loyalty discounts with buyer commitments can effectively divide markets and raise prices even if the discounts are above cost and cover less than half the market. This is because loyalty discounts create an externality where each buyer that accepts a discount softens competition and raises prices for all buyers. Loyalty discounts without commitments can also raise prices through similar mechanisms related to their impact on competition for free buyers. The key effects of loyalty discounts are to condition prices on purchase shares and commit sellers to charge loyal buyers less than non-loyal ones in a way that softens competition.
We present results from a laboratory experiment identifying the main channels through which different law enforcement strategies deter organized economic crime. The absolute level of a fine has a strong deterrence effect, even when the exogenous probability of apprehension is zero. This effect appears to be driven by distrust or fear of betrayal, as it increases significantly when the incentives to betray partners are strengthened by policies offering amnesty to “turncoat whistleblowers”. We also document a strong deterrence effect of the sum of fines paid in the past, which suggests a significant role for salience or availability heuristic in law enforcement.
Modern antitrust engenders a possible conflict between public and private enforcement due to the central role of Leniency Programs. Damage actions may reduce the attractiveness of Leniency Programs for cartel participants if their cooperation with the competition authority increases the chance that the cartel’s victims will bring a successful suit. A long legal debate culminated in a EU directive, adopted in November 2014, which seeks a balance between public and private enforcement. It protects the efectiveness of a Leniency Program by preventing the use of leniency statements in subsequent actions for damages and by limiting the liability of the immunity recipient to its direct and indirect purchasers. Our analysis shows such compromise is not required: limiting the cartel victims’ ability to recover their loss is not necessary to preserve the eectiveness of a Leniency Program and may be counterproductive. We show that damage actions will actually improve its eectiveness, through a legal regime in which the civil liability of the immunity recipient is minimized (as in Hungary) and full access to all evidence collected by the competition authority, including leniency statements, is granted to claimants (as in the US).
Check the latest research publications and presentations on our website http://www.hhs.se/site
In many organizations, decisions are taken by unanimity giving each member veto power. We analyze a model of an organization in which members with heterogenous productivity privately contribute to a common good. Under unanimity, the least efficient member imposes her preferred effort choice on the entire organization. The threat of forming an "inner organization" can undermine the veto power of the less efficient members and coerce them to exert more effort. We also identify the conditions under which the threat of forming an inner organization is executed. Finally, we show that majority rules effectively prevent the emergence of inner organizations.
Version of July 2009.
Read more research publications at: https://www.hhs.se/site
We extend the Ståhl-Rubinstein alternating-offer bargaining procedure to allow players, prior to each bargaining round, to simultaneously and visibly commit to some share of the pie. If commitment costs are small but increasing in the committed share, then the unique outcome consistent with common belief in future rationality (Perea, 2010), or more restrictively subgame perfect Nash equilibrium, exhibits a second mover advantage. In particular, as the smallest share of the pie approaches zero, the horizon approaches infinity, and commitment costs approach zero, the unique bargaining outcome corresponds to the reversed Rubinstein outcome (d =(1 + d); 1=(1 + d)), where d is the common discount factor.
8. the appropriate legal standard and sufficient economic evidence for exclu...Matias González Muñoz
This document summarizes a paper analyzing the legal standard and economic evidence used in the FTC's case against McWane regarding exclusive dealing. It discusses the dissenting opinion of Commissioner Wright, who argued for a heightened legal standard requiring "clear evidence" of harm to competition. The authors argue this standard is too high and could lead to under-enforcement. They also analyze the economic theories of harm from exclusive dealing and the evidence presented in the case. The authors conclude Commissioner Wright's proposed standard is not appropriate and would weaken antitrust enforcement.
3. the areeda-turner test for exclusionary pricing. a critical journalMatias González Muñoz
This document summarizes critiques of the Areeda-Turner test for predatory pricing that was proposed in 1975 and widely adopted by courts. It discusses three main critiques: 1) average variable cost is a poor surrogate for short-run marginal cost in assessing below-cost pricing; 2) the test is underdeterrent in markets with high fixed costs; and 3) short-run measures fail to address strategic predatory pricing. It also outlines how the test has made it extremely difficult for plaintiffs to prove predatory pricing and analyzes subsequent efforts to address criticisms, with the test remaining very favorable to defendants.
Since coming into office two years ago, Chinese President Xi Jinping has carried out a sweeping, highly publicized anticorruption campaign. Skeptics are debating whether the campaign is biased towards Mr. Xi’s rivals, and even possibly related to the current economic slowdown. What is less debated is the next stage of Mr. Xi’s anti-corruption strategy, which is going to alter the legal statutes. Amendment IX, proposed in October 2014, includes heavier penalties, but two important tools in the fight of corruption – one-sided leniency and asymmetric punishment – became more limited and discretional. We argue that studying a 1997 reform and its effects can shed some light onto why the Chinese leadership seems dissatisfied with the current legislation and the likely effects of the proposed changes.
Leniency policies offering immunity to the first cartel member that blows the whistle and self-reports to the antitrust authority have become the main instrument in the fight against cartels around the world. In public procurement markets, however, bid-rigging schemes are often accompanied by corruption of public officials. In the absence of coordinated forms of leniency for unveiling corruption, a policy offering immunity from antitrust sanctions may not be sufficient to encourage wrongdoers to blow the whistle, as the leniency recipient will then be exposed to the risk of conviction for corruption. Explicitly introducing leniency policies for corruption, as has been recently done in Brazil and Mexico, is only a first step. To increase the effectiveness of leniency in multiple offense cases, we suggest, besides extending automatic leniency to individual criminal sanctions, the creation of a ‘one-stop-point’ enabling firms and individuals to report different crimes simultaneously and receive leniency for all of them at once if they are entitled to it.
This document describes an experiment that tests for the existence of purely procedural preferences in economic decision making. It introduces three allocation procedures - a dictator game, yes-no game, and ultimatum game - that yield the same expected outcomes but differ in their procedural properties. Dominant economic theories predict no preference between the procedures. The experiment found that some participants exhibited preferences over the procedures, suggesting people may care about the process independently of outcomes. It aims to understand the psychological reasons for purely procedural preferences by relating them to aspects of moral judgment.
Leniency policies and asymmetric punishment are regarded as potentially powerful anticorruption
tools, also in the light of their success in busting price-fixing cartels. It has been
argued, however, that the introduction of these policies in China in 1997 has not helped
fighting corruption. Following up on this view, the Central Committee of the Chinese Communist
Party passed, in November 2015, a reform introducing heavier penalties, but also
restrictions to leniency. Properly designing and correctly evaluating these policies is difficult.
Corruption is only observed if detected, and an increase in convictions is consistent
with both reduced deterrence or improved detection. We map the evolution of the Chinese
anti-corruption legislation, collect data on corruption cases for the period 1986-2010, and
apply a new method to identify deterrence effects from changes in detected cases developed
for cartels by Miller (2009). We document a large and stable fall in corruption cases
starting immediately after the 1997 reform, consistent with a negative effect of the reform
on corruption detection, but under specific assumptions also with increased deterrence. To
resolve this ambiguity, we collect and analyze a random sample of case files from corruption
trials. Results point to a negative effect of the 1997 reform, linked to the increased leniency
also for bribe-takers cooperating after being denounced. This likely enhanced their ability
to retaliate against reporting bribe-givers – chilling detection through whistleblowing – as
predicted by theories on how these programs should (not) be designed.
ECONOMIC ANALYSIS OF LOYALTY DISCOUNTS AND REBATES AND THE ECONOMIC AND LEG...Luciana Ramondetti
This document provides an economic analysis of loyalty discounts and rebates. It begins with an introduction to different types of loyalty discounts, including fidelity rebates, target rebates, and bundle rebates. It then discusses recent legal cases involving loyalty discounts in both European and US competition law. The document analyzes the economic and legal implications of loyalty discounts, including potential anticompetitive effects like foreclosure of competition. It also considers potential procompetitive efficiencies. Finally, it examines alternative legal tests that have been used in Europe and the US to assess the legality of loyalty discount schemes.
This presentation by Okeoghene Odudu, Senior lecturer, Oxford University, was made during the discussion “Hub-and-spoke arrangements” held at the 132nd meeting of the OECD Competition Committee on 4 December 2019. More papers and presentations on the topic can be found at oe.cd/hsa.
Firms in developing countries often make informal payments to tax officials. These bribes raise the cost of doing business, and the price charged to consumers. To decrease these costs, we design a feedback incentive scheme for business tax inspectors that rewards them according to the anonymous evaluation submitted by inspected firms. We show theoreti- cally that feedback incentives decrease the bribe size, but make firms facing a more inelas- tic demand more attractive for inspectors. A tilted scheme that attaches higher weights to the evaluation of smaller firms limits the scope for targeting and decreases the bribe size to a lesser extent. We test both schemes in a field experiment in the Kyrgyz Republic. Our intervention reduces bribes and average business cost. As a result, the price firms charge to consumers decreases. Since fewer firms substitute bribes for taxes, tax revenues increase. Our results show that firms pass-through bribes to consumers, and that market structure shapes the relationship between firms and tax officials.
We study the interaction of organizational culture and personal pro-social orientation in team work where teams compete against each other. In a computerized lab experiment with minimal group design, we assign subjects to two alternative subliminally primed organizational cultures emphasizing either self-enhancement or self-trancendence. We find that effort is highest in self-trancendent teams and prosocially oriented subjects perform better than proself-oriented under that culture. In any other value-culture-mechanism constellation, performance is worse and/or prosocials and proselves do not di¤er in provided effort. These findings point out the importance of a "triple-fit" of preferences, organizational culture and incentive mechanism.
Impact evaluations aim to predict the future, but they are rooted in particular contexts and to what extent they generalize is an open and important question. I founded an organization to systematically collect and synthesize impact evaluation results on a wide variety of interventions in development. These data allow me to answer this and other questions for the rst time using a large data set of studies. I consider several measures of generalizability, discuss the strengths and limitations of each metric, and provide benchmarks based on the data. I use the example of the eect of conditional cash transfers on enrollment rates to show how some of the heterogeneity can be modelled and the eect this can have on the generalizability measures. The predictive power of the model improves over time as more studies are completed. Finally, I show how researchers can
estimate the generalizability of their own study using their own data, even when data from no comparable studies exist.
Read more at: www.hhs.se/site
This paper reports results from an experiment studying how fines, leniency programs and reward schemes for whistleblowers affect cartel formation and prices. Antitrust without leniency reduces cartel formation, but increases cartel prices: subjects use costly fines as (altruistic) punishments. Leniency further increases deterrence, but stabilizes surviving cartels: subjects appear to anticipate harsher times after defections as leniency reduces recidivism and lowers post-conviction prices. With rewards, cartels are reported systematically and prices finally fall. If a ringleader is excluded from leniency, deterrence is unaffected but prices grow. Differences between treatments in Stockholm and Rome suggest culture may affect optimal law enforcement.
The EU Leniency Programme (LP) aims to encourage the dissolution of existing cartels and the deterrence of future cartels, through spontaneous reporting and/or significant cooperation by cartel members during an investigation. However, the European Commission guidelines are rather vague in terms of the factors that influence the granting and scale of fine reductions. As expected, the results shown that the first reporting or cooperating firm receives generous fine reductions. More importantly, there is some evidence that firms can “learn how to play the leniency game”, either learning how to cheat or how to report, as the reductions given to multiple oenders (and their cartel partners) are substantially higher. These results have an ambiguous impact on firms’ incentives and major implications for policy making.
By Catarina Marvao, SITE Working Paper.
This document discusses Most Favoured Nation (MFN) clauses, which originated in international trade agreements. It describes the potential pro-competitive and anti-competitive effects of MFN clauses, noting they can limit price discrimination and transaction costs but may also reduce incentives to lower prices. The assessment of MFN clauses is fact-specific and dependent on the market position of parties and characteristics of the market. Recent EU cases involving MFN clauses in the hotel and e-books sectors are also mentioned.
1. robust exclusion and market division through loyalty discountsMatias González Muñoz
This document summarizes research on the effects of loyalty discounts in markets. It finds that loyalty discounts with buyer commitments can effectively divide markets and raise prices even if the discounts are above cost and cover less than half the market. This is because loyalty discounts create an externality where each buyer that accepts a discount softens competition and raises prices for all buyers. Loyalty discounts without commitments can also raise prices through similar mechanisms related to their impact on competition for free buyers. The key effects of loyalty discounts are to condition prices on purchase shares and commit sellers to charge loyal buyers less than non-loyal ones in a way that softens competition.
We present results from a laboratory experiment identifying the main channels through which different law enforcement strategies deter organized economic crime. The absolute level of a fine has a strong deterrence effect, even when the exogenous probability of apprehension is zero. This effect appears to be driven by distrust or fear of betrayal, as it increases significantly when the incentives to betray partners are strengthened by policies offering amnesty to “turncoat whistleblowers”. We also document a strong deterrence effect of the sum of fines paid in the past, which suggests a significant role for salience or availability heuristic in law enforcement.
Modern antitrust engenders a possible conflict between public and private enforcement due to the central role of Leniency Programs. Damage actions may reduce the attractiveness of Leniency Programs for cartel participants if their cooperation with the competition authority increases the chance that the cartel’s victims will bring a successful suit. A long legal debate culminated in a EU directive, adopted in November 2014, which seeks a balance between public and private enforcement. It protects the efectiveness of a Leniency Program by preventing the use of leniency statements in subsequent actions for damages and by limiting the liability of the immunity recipient to its direct and indirect purchasers. Our analysis shows such compromise is not required: limiting the cartel victims’ ability to recover their loss is not necessary to preserve the eectiveness of a Leniency Program and may be counterproductive. We show that damage actions will actually improve its eectiveness, through a legal regime in which the civil liability of the immunity recipient is minimized (as in Hungary) and full access to all evidence collected by the competition authority, including leniency statements, is granted to claimants (as in the US).
Check the latest research publications and presentations on our website http://www.hhs.se/site
In many organizations, decisions are taken by unanimity giving each member veto power. We analyze a model of an organization in which members with heterogenous productivity privately contribute to a common good. Under unanimity, the least efficient member imposes her preferred effort choice on the entire organization. The threat of forming an "inner organization" can undermine the veto power of the less efficient members and coerce them to exert more effort. We also identify the conditions under which the threat of forming an inner organization is executed. Finally, we show that majority rules effectively prevent the emergence of inner organizations.
Version of July 2009.
Read more research publications at: https://www.hhs.se/site
We extend the Ståhl-Rubinstein alternating-offer bargaining procedure to allow players, prior to each bargaining round, to simultaneously and visibly commit to some share of the pie. If commitment costs are small but increasing in the committed share, then the unique outcome consistent with common belief in future rationality (Perea, 2010), or more restrictively subgame perfect Nash equilibrium, exhibits a second mover advantage. In particular, as the smallest share of the pie approaches zero, the horizon approaches infinity, and commitment costs approach zero, the unique bargaining outcome corresponds to the reversed Rubinstein outcome (d =(1 + d); 1=(1 + d)), where d is the common discount factor.
8. the appropriate legal standard and sufficient economic evidence for exclu...Matias González Muñoz
This document summarizes a paper analyzing the legal standard and economic evidence used in the FTC's case against McWane regarding exclusive dealing. It discusses the dissenting opinion of Commissioner Wright, who argued for a heightened legal standard requiring "clear evidence" of harm to competition. The authors argue this standard is too high and could lead to under-enforcement. They also analyze the economic theories of harm from exclusive dealing and the evidence presented in the case. The authors conclude Commissioner Wright's proposed standard is not appropriate and would weaken antitrust enforcement.
3. the areeda-turner test for exclusionary pricing. a critical journalMatias González Muñoz
This document summarizes critiques of the Areeda-Turner test for predatory pricing that was proposed in 1975 and widely adopted by courts. It discusses three main critiques: 1) average variable cost is a poor surrogate for short-run marginal cost in assessing below-cost pricing; 2) the test is underdeterrent in markets with high fixed costs; and 3) short-run measures fail to address strategic predatory pricing. It also outlines how the test has made it extremely difficult for plaintiffs to prove predatory pricing and analyzes subsequent efforts to address criticisms, with the test remaining very favorable to defendants.
Since coming into office two years ago, Chinese President Xi Jinping has carried out a sweeping, highly publicized anticorruption campaign. Skeptics are debating whether the campaign is biased towards Mr. Xi’s rivals, and even possibly related to the current economic slowdown. What is less debated is the next stage of Mr. Xi’s anti-corruption strategy, which is going to alter the legal statutes. Amendment IX, proposed in October 2014, includes heavier penalties, but two important tools in the fight of corruption – one-sided leniency and asymmetric punishment – became more limited and discretional. We argue that studying a 1997 reform and its effects can shed some light onto why the Chinese leadership seems dissatisfied with the current legislation and the likely effects of the proposed changes.
Leniency policies offering immunity to the first cartel member that blows the whistle and self-reports to the antitrust authority have become the main instrument in the fight against cartels around the world. In public procurement markets, however, bid-rigging schemes are often accompanied by corruption of public officials. In the absence of coordinated forms of leniency for unveiling corruption, a policy offering immunity from antitrust sanctions may not be sufficient to encourage wrongdoers to blow the whistle, as the leniency recipient will then be exposed to the risk of conviction for corruption. Explicitly introducing leniency policies for corruption, as has been recently done in Brazil and Mexico, is only a first step. To increase the effectiveness of leniency in multiple offense cases, we suggest, besides extending automatic leniency to individual criminal sanctions, the creation of a ‘one-stop-point’ enabling firms and individuals to report different crimes simultaneously and receive leniency for all of them at once if they are entitled to it.
This document describes an experiment that tests for the existence of purely procedural preferences in economic decision making. It introduces three allocation procedures - a dictator game, yes-no game, and ultimatum game - that yield the same expected outcomes but differ in their procedural properties. Dominant economic theories predict no preference between the procedures. The experiment found that some participants exhibited preferences over the procedures, suggesting people may care about the process independently of outcomes. It aims to understand the psychological reasons for purely procedural preferences by relating them to aspects of moral judgment.
Leniency policies and asymmetric punishment are regarded as potentially powerful anticorruption
tools, also in the light of their success in busting price-fixing cartels. It has been
argued, however, that the introduction of these policies in China in 1997 has not helped
fighting corruption. Following up on this view, the Central Committee of the Chinese Communist
Party passed, in November 2015, a reform introducing heavier penalties, but also
restrictions to leniency. Properly designing and correctly evaluating these policies is difficult.
Corruption is only observed if detected, and an increase in convictions is consistent
with both reduced deterrence or improved detection. We map the evolution of the Chinese
anti-corruption legislation, collect data on corruption cases for the period 1986-2010, and
apply a new method to identify deterrence effects from changes in detected cases developed
for cartels by Miller (2009). We document a large and stable fall in corruption cases
starting immediately after the 1997 reform, consistent with a negative effect of the reform
on corruption detection, but under specific assumptions also with increased deterrence. To
resolve this ambiguity, we collect and analyze a random sample of case files from corruption
trials. Results point to a negative effect of the 1997 reform, linked to the increased leniency
also for bribe-takers cooperating after being denounced. This likely enhanced their ability
to retaliate against reporting bribe-givers – chilling detection through whistleblowing – as
predicted by theories on how these programs should (not) be designed.
ECONOMIC ANALYSIS OF LOYALTY DISCOUNTS AND REBATES AND THE ECONOMIC AND LEG...Luciana Ramondetti
This document provides an economic analysis of loyalty discounts and rebates. It begins with an introduction to different types of loyalty discounts, including fidelity rebates, target rebates, and bundle rebates. It then discusses recent legal cases involving loyalty discounts in both European and US competition law. The document analyzes the economic and legal implications of loyalty discounts, including potential anticompetitive effects like foreclosure of competition. It also considers potential procompetitive efficiencies. Finally, it examines alternative legal tests that have been used in Europe and the US to assess the legality of loyalty discount schemes.
This presentation by Okeoghene Odudu, Senior lecturer, Oxford University, was made during the discussion “Hub-and-spoke arrangements” held at the 132nd meeting of the OECD Competition Committee on 4 December 2019. More papers and presentations on the topic can be found at oe.cd/hsa.
Firms in developing countries often make informal payments to tax officials. These bribes raise the cost of doing business, and the price charged to consumers. To decrease these costs, we design a feedback incentive scheme for business tax inspectors that rewards them according to the anonymous evaluation submitted by inspected firms. We show theoreti- cally that feedback incentives decrease the bribe size, but make firms facing a more inelas- tic demand more attractive for inspectors. A tilted scheme that attaches higher weights to the evaluation of smaller firms limits the scope for targeting and decreases the bribe size to a lesser extent. We test both schemes in a field experiment in the Kyrgyz Republic. Our intervention reduces bribes and average business cost. As a result, the price firms charge to consumers decreases. Since fewer firms substitute bribes for taxes, tax revenues increase. Our results show that firms pass-through bribes to consumers, and that market structure shapes the relationship between firms and tax officials.
We study the interaction of organizational culture and personal pro-social orientation in team work where teams compete against each other. In a computerized lab experiment with minimal group design, we assign subjects to two alternative subliminally primed organizational cultures emphasizing either self-enhancement or self-trancendence. We find that effort is highest in self-trancendent teams and prosocially oriented subjects perform better than proself-oriented under that culture. In any other value-culture-mechanism constellation, performance is worse and/or prosocials and proselves do not di¤er in provided effort. These findings point out the importance of a "triple-fit" of preferences, organizational culture and incentive mechanism.
Impact evaluations aim to predict the future, but they are rooted in particular contexts and to what extent they generalize is an open and important question. I founded an organization to systematically collect and synthesize impact evaluation results on a wide variety of interventions in development. These data allow me to answer this and other questions for the rst time using a large data set of studies. I consider several measures of generalizability, discuss the strengths and limitations of each metric, and provide benchmarks based on the data. I use the example of the eect of conditional cash transfers on enrollment rates to show how some of the heterogeneity can be modelled and the eect this can have on the generalizability measures. The predictive power of the model improves over time as more studies are completed. Finally, I show how researchers can
estimate the generalizability of their own study using their own data, even when data from no comparable studies exist.
Read more at: www.hhs.se/site
We argue that the tilt towards donor interests over recipient needs in aid allocation and practices may be particularly strong in new partnerships. Using the natural experiment of Eastern transition we find that commercial and strategic concerns influenced both aid flows and entry in the first half of the 1990s, but much less so later on. We also find that fractionalization increased and that early aid to the region was particularly volatile, unpredictable and tied. Our results may explain why aid to Iraq and Afghanistan has had little development impact and serve as warning for Burma and Arab Spring regimes.
Comments by Elena Paltseva on paper "Reforming an Institutional Culture: A Model of Motivated Agents and Collective Reputation" presented by Justin Valasek at the SITE Corruption Conference, 31 August 2015.
Find more at: https://www.hhs.se/site
We examine the effects of bank deregulation on the spatial dynamics of retail-bank branching, exploiting, much like a quasi-natural experiment, the context of intense liberalization
reforms in Belgium in the late nineties. Using fine-grained data on branch network dynamics within the metropolitan area of Antwerp and advancing novel spatial econometric techniques, we show that these liberalization reforms radically shifted and accelerated branch network dynamics. Entry and exit dynamics substantially intensified, the level change in financial void grew significantly, and bank choice markedly declined. Moreover, all these changes consistently extended (even with greater intensity) after the liberalization peak. However, the immediate and longer-term spatial ramifications of the financial sector liberalization were very distinct. All immediate changes systematically, differentially impacted the poorer and wealthier neighborhoods, disenfranchising the poorer neighbourhoods and favoring their wealthier counterparts. The longer-term e¤ects on spatial patterns of change no longer exhibited this systematic relationship with neighborhood income. We draw out the policy implications of our findings.
The Nordic low carbon transition and lessons for other countries
Presentation by Professor of Business and Social Sciences, Aarhus University and Director of Danish Centre for Energy Technologies
Energy Day, Stockholm School of Economics, SITE December 2014
To avoid strikes and curb labour militancy, some governments have introduced legislation stating that union leadership as well as wage offers should be decided through union-wide ballots. This paper shows that members still have incentives to appoint militant union leaders, if these leaders have access to information critical for the members' voting decisions. Furthermore, conflicts may arise in equilibrium even though the contract zone is never empty and there is an option to resolve any incomplete information. Ballot requirements hence preclude neither militant union bosses nor inefficient conflicts.
The paper investigates the possibility, first suggested by Avinash Dixit and Mancur Olson (2000), that the Coase Theorem may be inconsistent with natural notions of voluntary participation. Retaining Dixit and Olson’s denotion of voluntariness, we consider bargaining over the provision of club goods. Although property rights are well dened and there are no transaction costs, we provide examples in which the unique equilibrium outcome is inefficient under a variety of bargaining protocols. The reason is that some agents may profit from not participating at the club good provision stage, but instead negotiate access ex post.
The final version of the paper is published with title "The Private Provision of Excludable Public Goods: An Inefficiency Result”, with Tore Ellingsen (2012), the Journal of Public Economics, vol. 96(9-10), pp.658-669.
This is the working paper version on 16 February 2011.
Read more research publications at: https://www.hhs.se/site
Mass deportations and killings of Ottoman Armenians during WWI and the Greek-Turkish population exchange after the Greco-Turkish War of 1919-1922 were the two major events of the early 20th century that permanently changed the ethno-religious landscape of Anatolia. These events marked the end of centuries-long coexistence of the Muslim populations with the two biggest Christian communities of the region. These communities played a dominant role in craftsmanship, manufacturing, commerce and trade in the Empire. In this paper, we empirically investigate the long-run contribution of the Armenian and Greek communities in the Ottoman period on regional development in modern Turkey. We show that districts with greater presence of Greek and Armenian minorities at the end of the 19th century are systematically more densely populated, more urbanized and exhibit greater economic activity today. These results are qualitatively robust to accounting for an extensive set of geographical and historical factors that might have in influenced long-run development on the one hand and minority settlement patterns on the other. We explore two potential channels of persistence. First, we provide evidence that Greeks and Armenians might have contributed to long-run economic development through their legacy on human capital accumulation at the local level. This finding possibly reflects the role of inter-group spillovers of cultural values, technology and know-how as well as the self-selection of skilled labor into modern economic sectors established by Armenian and Greek entrepreneurs. Second, we show some evidence supporting the hypothesis that minority assets were also instrumental in the development of a modern national economy in Turkey.
Read more at: https://www.hhs.se/site
Does Islamic political control affect women's empowerment? Several countries have recently experienced Islamic parties coming to power through democratic elections. Due to strong support among religious conservatives, constituencies with Islamic rule often tend to exhibit poor women's rights. Whether this relationship reflects a causal or a spurious one has so far gone unexplored. I provide the first piece of evidence using a new and unique dataset of Turkish municipalities. In 1994, an Islamic party won multiple municipal mayor seats across the country. Using a regression discontinuity (RD) design, I compare municipalities where this Islamic party barely won or lost elections. Despite negative raw correlations, the RD results reveal that over a period of six years, Islamic rule increased female secular high school education. Corresponding effects for men are systematically smaller and less precise. In the longer run, the effect on female education remained persistent up to 17 years after and also reduced adolescent marriages. An analysis of long-run political effects of Islamic rule shows increased female political participation and an overall decrease in Islamic political preferences. The results are consistent with an explanation that emphasizes the Islamic party's effectiveness in
overcoming barriers to female entry for the poor and pious.
1.. Islamic Rule and the Emancipation of the Poor and Pious
I estimate the impact of Islamic rule on secular education and labor market outcomes with a new and unique dataset of Turkish municipalities. Using a regression discontinuity design, I compare elections where an Islamic party barely won or lost municipal mayor seats. The results show that Islamic rule has had a large positive effect on education, predominantly for women. This impact is not only larger when the opposing candidate is from a secular left-wing, instead of a right-wing party; it is also larger in poorer and more pious areas. The participation result extends to the labor market, with fewer women classified as housewives, a larger share of employed women receiving wages, and a shift in female employment towards higher-paying sectors. Part of the increased participation, especially in education, may come through investment from religious foundations, by providing facilities more tailored toward religious conservatives. Altogether, my findings stand in contrast to the stylized view that more Islamic in‡uence is invariably associated with adverse development outcomes, especially for women. One interpretation is that limits on religious expression, such as the headscarf ban in public institutions, raise barriers to entry for the poor and pious. In such environments, Islamic movements may have an advantage over secular alternatives.
2. Islam and Long-Run Development
I show new evidence on the long-run impact of Islam on economic development. Using the proximity to Mecca as an instrument for the Muslim share of a country's population, while holding geographic factors fixed, I show that Islam has had a negative long-run impact on income per capita. This result is robust to a host of geographic, demographic and historical factors, and the impact magnitude is around three times that of basic cross-sectional estimates. I also show evidence of the impact of Islam on religious influence in legal institutions and women's rights, two outcomes seen as closely associated with the presence of Islam. A larger Islamic influence has led to a larger religious influence in legal institutions and lower female participation in public institutions. But it has also had a positive impact on several measures of female health outcomes relative to men. These results stand in contrast to the view that Islam has invariably adverse consequences for all forms of women's living standards, and instead emphasizes the link between lower incomes and lower female participation in public institutions.
3. The Rise of China and the Natural Resource Curse in Africa
We produce a new empirical strategy to estimate the causal impact of selling oil to China on economic and political development, using an instrumental variables design based on China's economic rise and consequent demand for oil in interaction with the pre-existence of oil in Sub-Saharan Africa.
This policy brief examines the timing of Turkey’s authoritarian turn using raw data measuring freedoms from the Freedom House (FH). It shows that Turkey’s authoritarian turn under the ruling AKP is not a recent phenomenon. Instead, the country’s institutional erosion – especially in terms of freedoms of expression and political pluralism – in fact began much earlier, and the losses in the earlier periods so far tend to dwarf those occurring later.
The document discusses financing sustainable development in Africa. It outlines the Common African Position (CAP) on the post-2015 development agenda, which calls for improving domestic resource mobilization, innovative financing, and quality external financing partnerships. The document also examines Africa's economic transformation needs, including increasing agricultural productivity and revitalizing manufacturing. It analyzes trends in infrastructure financing from public-private partnerships, China, and other sources. Overall, the document emphasizes that domestic resource mobilization should be the priority and financial flows must consider broader development strategies and impacts.
Honorary Lecture by Prof. Giancarlo Spagnolo at IMPPM Opening Ceremony, University of Rome Tor Vergata, March 1, 2016.
To read more research articles, please visit https://www.hhs.se/site
“A STUDY ON THE GROWTH OF DERIVATIVES MARKET IN INDIA”IRJET Journal
This document provides an overview of derivatives markets in India. It defines different types of derivatives such as options, futures, forwards, and swaps. Futures contracts and forward contracts are described as agreements to buy or sell an asset at a future date and price, with the key difference being that futures contracts are standardized and exchange-traded, while forwards are customized over-the-counter contracts. The document discusses how these derivatives can be used for hedging, speculation, and gaining exposure to different asset classes or markets.
This document summarizes a paper by Aghion and Bolton on entry-prevention contracts. The paper argues that exclusive contracts between sellers and buyers are designed to prevent entry from potential competitors and extract some of the surplus an entrant could gain. These contracts introduce social costs by blocking more efficient entrants from the market. The contracts specify liquidated damages that act as an entry fee, requiring entrants to lower prices enough to induce the buyer to switch and pay damages to the incumbent seller. While initially arguing long-term contracts are mutually beneficial, the paper finds empirical evidence shows contracts are actually short-term, and seeks to determine the optimal contract length from the perspective of minimizing social costs from entry prevention.
This document discusses forex hedging vehicles such as currency futures. It begins by introducing currency futures and how they were the first futures contract for foreign currencies, being introduced in 1972. It then discusses how currency futures allow exporters and importers to hedge against foreign currency risk by taking long or short positions in currency futures. The document provides examples of how an exporter could take a short position in currency futures to hedge against their foreign currency exposure from exports, while an importer could take a long position to hedge their foreign currency needs for imports. It also discusses other forex hedging vehicles such as forward rate agreements.
This document discusses derivatives and provides examples to illustrate different types of derivative instruments like forward contracts, futures contracts, and options contracts. It explains how these instruments allow firms to hedge against various risks like commodity price fluctuations, interest rate changes, and exchange rate movements. The document also provides examples of how these derivatives work and are used to manage risk in situations like an imported goods transaction and investing in stocks.
This document discusses derivatives and provides examples to illustrate different types of derivative instruments like forward contracts, futures contracts, and options contracts. It explains how these instruments allow firms to hedge against various risks like commodity price fluctuations, interest rate changes, and exchange rate movements. The document also provides examples of how these derivatives work and are used to manage risk in situations like an imported goods transaction and investing in stocks.
The Role and Importance of the Transactions Costs Theory in Agricultural Cont...IOSRJBM
Formal contractual arrangements cover a considerable share of globe agricultural production. Agricultural contracts can have many beneficial effects. They can help farmers manage price and production risks, thus encouraging more efficient use of farm and processing capacities. But contracts can also have less benign effects. They can introduce new and unexpected risks for farmers—in some circumstances, they can extend a buyer’s market power— and they can effect fundamental changes in how farming is organized and carried out. In this our article we address transaction cost theory (TCT) in some details as a theoretical framework in study of methodology of agreements and contracts, for proving the role and importance of this theory on agriculture contracting area based on eight empirical studies on assessing transaction costs in different farms. Main finding is there are diverse opinions on the applicability of the transaction costs theory in agricultural contracting scope of different management decision-making processes. These opinions developed over a long period of time following continuous improvement on the application of the theory in solving of the outsourcing business problems. These studies also proved that transaction costs are difficult to measure and there is no standard procedure to assess transaction costs, but they can and should be estimated because they are important cost elements in the decision-making process concerning the choice of contract for different outsourcing agricultural production stages.
The document discusses how contracts between buyers and sellers can act as barriers to entry for potential competitors. It presents a model where an incumbent seller faces the threat of a more efficient entrant entering the market. The model shows that the incumbent and buyer can sign long-term contracts that set "liquidated damages" fees that potential entrants must pay to induce the buyer to switch from the incumbent. These contracts allow the incumbent and buyer to jointly extract surplus from entrants and block some more efficient entrants, introducing social costs. The optimal contract length balances extracting surplus from entrants against blocking too many efficient entrants.
The document discusses derivatives and their role in emerging markets. It then evaluates arguments that have been made against derivatives from an Islamic perspective. Specifically:
1) It addresses concerns about speculation in derivatives markets, explaining that large trading volumes are due to risk dissipation, not solely speculation.
2) It discusses arguments around non-delivery in derivatives contracts, noting that even hedgers may prefer cash settlement to physical delivery.
3) It explains that cash settlement provides convenience and reduces costs for both parties, while also preventing market cornering attempts. The document concludes by examining salam and istisna contracts as potential Islamic alternatives to conventional forward contracts.
Derivatives are financial instruments whose value is derived from an underlying asset. There are several types of derivatives:
1) Forward contracts are customized agreements between two parties to buy or sell an asset at a future date for a fixed price, exposing the parties to counterparty risk.
2) Futures contracts are similar to forwards but are exchange-traded, with standardized terms, eliminating counterparty risk.
3) Options contracts give the holder the right, but not the obligation, to buy or sell the underlying asset at a specified price on or before the expiration date.
4) Warrants and convertibles give holders the right to buy or convert into the underlying asset within a given time period.
Derivatives are financial instruments whose value is derived from an underlying asset. There are several types of derivatives:
1) Forward contracts are customized agreements between two parties to buy or sell an asset at a future date for a fixed price, exposing the parties to counterparty risk.
2) Futures contracts are similar to forwards but are exchange-traded, with standardized terms, eliminating counterparty risk.
3) Options contracts give the holder the right, but not the obligation, to buy or sell the underlying asset at a specified price on or before the expiration date.
4) Warrants and convertibles give holders the right to buy or convert into the underlying asset within a given time period.
Running Head ELEMENTS OF A CONTRACT 1 .docxtodd271
Running Head: ELEMENTS OF A CONTRACT
1
ELEMENTS OF A CONTRACT
6
Elements of a Contract
BUS 670 Legal Environment
12/11/17
Elements of a Contract
A contract of employment refers to the agreement between the employer and employee that forms the basis for an employment relationship. In most cases, a contract takes effect as soon as an employee employment offer is accepted. By starting to work ideally demonstrates that the employee has accepted the employer’s terms and conditions bade. However, an existing employment contract can only be varied with the understanding of both parties. To grasp entropy behind varying or changing a contract.
Contract cancellation occurs when either party involved ends a contract supposedly for a violation by the other. The party that cancels that contract retains any remediation for the violation of the contract. When one party breaches the terms and conditions of the signed contract, the other concerned party bears the right to cancel. As such, the integral contract may be rolled down, refunding of previously payments and ending any remaining obligations. Contract termination falls out when either party involved ends a contract in other respects prior to a breach as perceived by the scenario.
With this integral occurrence, any components of a contract that had initially to be accomplished will be left behind, but any future obligations that are not yet carried out will cease. However, like the binding of the contract, the requisite elements of contract terms that must be established in order to demonstrate the legal formality for the process involves; offer, acceptance, consideration, mutuality of obligation and competency (Tepper, 2014).
About to offer, it is crucial to check out the terms and conditions of the agreement of a termination or rescission clause. Recession basically relates to the act of rescinding; the cancellation of a contract and the return of the parties to the positions they would have had if the contract had not been made (Morawetz, 1925). Some contractual agreements might automatically terminate the contract after a fixed event or term while some can be canceled officially without the permission of another party. If the contractual agreement is arranged to terminate within the near future, then one might only allow the contract to lapse. All the same, if the contract agreement has a friendly rescission clause, then contract termination may not be of the essence.
Following the apprehension of the terms and condition, one is thereby expected to verify whether the agreement is accorded a notice provision. Much of contractual agreements require that all established correspondence among the parties involved be executed through communication in writing. Set off the address of o.
A Conceptual Framework For B2B Electronic ContractingLuisa Polanco
This document proposes a conceptual framework for business-to-business contracting support. The framework provides a complete view of the contracting field and allows positioning research efforts in the domain. It identifies four main groups of contracting concepts: Who (parties involved), Where (context), What (content), and How (processes). Each concept group is then elaborated with increasing levels of detail. The framework is used to analyze two current research projects and identify future research areas, particularly related to improving contract enactment processes and cooperation support services.
This document provides guidance on framework agreements under the 2006 Public Contracts and Utilities Contracts Regulations. It defines a framework agreement as an agreement between contracting authorities and economic operators that establishes terms for entering contracts during the framework period. It discusses setting up framework agreements, including considering early if it is appropriate, advertising in OJEU, and awarding the agreement. It also covers calling off individual contracts under existing frameworks in compliance with EU principles.
Derivatives Contracts in Indian Electricity MarketAmitava Nag
Supreme Court is overseeing the issue of electricity futures jurisdiction between SEBI and CERC. SEBI is expected to oversee the functioning of all financially traded electricity forwards while CERC would regulate physically settled forward where electricity is delivered on future date at the contracted price.
Once future trading is started, power exchanges would be in a position to offer derivative instruments to participants. This could be electricity futures with a clear delivery based schedule (delivery at a price on future date) and other derivative instruments such as call and put options. This will help both generators and consumers to mitigate risks by hedging their positions through derivative instruments.
This document discusses elements that should be included in contracts for custom software development projects with fixed prices. It recommends including: definitions, parties involved, documents incorporated like requirements specifications, what will be delivered, ownership of intellectual property rights, and procedures for handling changes to requirements. The contract aims to anticipate potential issues, define responsibilities clearly, and provide a framework for resolving disputes. Careful drafting of contracts is important for protecting all parties and avoiding problems down the road.
10 Small Bus and New Mistakes Article, August 2015, BNA Bloomberg FCRRichard D. Lieberman
1. The document discusses ten big mistakes commonly made by small businesses and new government contractors. It explains that the differences between commercial and federal government contracting often account for misunderstandings.
2. Federal contracting has a much more extensive statutory and regulatory framework compared to commercial contracts. It also has different types of contracts like cost-reimbursement. Government contracts also generally require more formality with written documents and competition.
3. The authority of agents, auditing practices, socioeconomic requirements, contract modifications, consideration requirements, and termination for convenience differ significantly between commercial and government contracting. Understanding these differences is important to avoid common mistakes.
This document provides an overview of derivatives, including what they are, the different types (forwards/futures, options, swaps), how they are traded (exchange-traded vs over-the-counter), and their significance in Pakistan. It defines derivatives as financial instruments whose value is based on an underlying variable, and discusses how they can be used to hedge risk. The main types of derivatives contracts - forwards/futures, options, and swaps - are explained. It also outlines recommendations to promote Pakistan's nascent derivatives markets, such as addressing concerns of market participants and improving financial literacy.
RESALE PRICE MAINTENANCE IN INDIAN COMPETITION SCHEME VIS A VIS IMPACT OF EU ...Sahil Sharma
This document discusses resale price maintenance (RPM) agreements under Indian competition law and compares it to approaches in the EU and US. It notes that RPM agreements are considered anti-competitive as they can distort price competition between retailers. The document provides background on different types of RPM agreements (minimum, maximum, recommended, fixed). It analyzes India's treatment of RPM under the Competition Act of 2002, noting that unlike many jurisdictions, India does not have a per se prohibition and instead applies a rule of reason standard to evaluate the effects of such agreements. The document discusses debates around prohibiting minimum RPM agreements and the types of competition distortions they can cause.
There are three main types of traders in futures markets - hedgers who seek to reduce risk, speculators who take on risk in hopes of profiting from price movements, and arbitrageurs who exploit temporary mispricings across related markets. Futures contracts are standardized to specify the deliverable asset, amount, location, and timing of delivery. Daily mark-to-market and margin adjustments help minimize the risk of default on futures positions.
Similar to The Length of Contracts and Collusion (20)
Presented by Anastasia Luzgina during the conference "Belarus at the crossroads: The complex role of sanctions in the context of totalitarian backsliding" on April 23, 2024.
Presented by Erlend Bollman Bjørtvedt during the conference "Belarus at the crossroads: The complex role of sanctions in the context of totalitarian backsliding" on April 23, 2024.
Presented by Dzimtry Kruk during the conference "Belarus at the crossroads: The complex role of sanctions in the context of totalitarian backsliding" on April 23, 2024.
Presented by Lev Lvovskiy during the conference "Belarus at the crossroads: The complex role of sanctions in the context of totalitarian backsliding" on April 23, 2024.
Presented by Chloé Le Coq, Professor of Economics, University of Paris-Panthéon-Assas, Economics and Law Research Center (CRED), during SITE 2023 Development Day conference.
This year’s SITE Development Day conference will focus on the Russian war on Ukraine. We will discuss the situation in Ukraine and neighbouring countries, how to finance and organize financial support within the EU and within Sweden, and how to deal with the current energy crisis.
This year’s SITE Development Day conference will focus on the Russian war on Ukraine. We will discuss the situation in Ukraine and neighbouring countries, how to finance and organize financial support within the EU and within Sweden, and how to deal with the current energy crisis.
The document provides an agenda for an event titled "#AcademicsStandWithUkraine" being held on December 6, 2022 in Stockholm, Sweden. The day-long event will feature discussions on supporting Ukraine, the EU response, and the energy crisis, with panels including representatives from Ukrainian and European universities and organizations, as well as the Swedish and European governments. Speakers will discuss fiscal policy in Ukraine, Swedish and EU support for Ukraine, and the regional impact of the war.
The (Ce)² Workshop is organised as an initiative of the FREE Network by one of its members, the Centre for Economic Analysis (CenEA, Poland) together with the Centre for Microdata Methods and Practice (CeMMAP, UK). This will be the seventh edition of the workshop which will be held in Warsaw on 27-28 June 2022.
The (Ce)2 workshop is organised as an initiative of the FREE Network by one of its members, the Centre for Economic Analysis (CenEA, Poland) together with the Centre for Microdata Methods and Practice (CeMMAP, UK). This will be the seventh edition of the workshop which will be held in Warsaw on 27-28 June 2022.
The (Ce)2 workshop is organised as an initiative of the FREE Network by one of its members, the Centre for Economic Analysis (CenEA, Poland) together with the Centre for Microdata Methods and Practice (CeMMAP, UK). This will be the seventh edition of the workshop which will be held in Warsaw on 27-28 June 2022.
The (Ce)2 workshop is organised as an initiative of the FREE Network by one of its members, the Centre for Economic Analysis (CenEA, Poland) together with the Centre for Microdata Methods and Practice (CeMMAP, UK). This will be the seventh edition of the workshop which will be held in Warsaw on 27-28 June 2022.
The Ipsos - AI - Monitor 2024 Report.pdfSocial Samosa
According to Ipsos AI Monitor's 2024 report, 65% Indians said that products and services using AI have profoundly changed their daily life in the past 3-5 years.
End-to-end pipeline agility - Berlin Buzzwords 2024Lars Albertsson
We describe how we achieve high change agility in data engineering by eliminating the fear of breaking downstream data pipelines through end-to-end pipeline testing, and by using schema metaprogramming to safely eliminate boilerplate involved in changes that affect whole pipelines.
A quick poll on agility in changing pipelines from end to end indicated a huge span in capabilities. For the question "How long time does it take for all downstream pipelines to be adapted to an upstream change," the median response was 6 months, but some respondents could do it in less than a day. When quantitative data engineering differences between the best and worst are measured, the span is often 100x-1000x, sometimes even more.
A long time ago, we suffered at Spotify from fear of changing pipelines due to not knowing what the impact might be downstream. We made plans for a technical solution to test pipelines end-to-end to mitigate that fear, but the effort failed for cultural reasons. We eventually solved this challenge, but in a different context. In this presentation we will describe how we test full pipelines effectively by manipulating workflow orchestration, which enables us to make changes in pipelines without fear of breaking downstream.
Making schema changes that affect many jobs also involves a lot of toil and boilerplate. Using schema-on-read mitigates some of it, but has drawbacks since it makes it more difficult to detect errors early. We will describe how we have rejected this tradeoff by applying schema metaprogramming, eliminating boilerplate but keeping the protection of static typing, thereby further improving agility to quickly modify data pipelines without fear.
Orchestrating the Future: Navigating Today's Data Workflow Challenges with Ai...Kaxil Naik
Navigating today's data landscape isn't just about managing workflows; it's about strategically propelling your business forward. Apache Airflow has stood out as the benchmark in this arena, driving data orchestration forward since its early days. As we dive into the complexities of our current data-rich environment, where the sheer volume of information and its timely, accurate processing are crucial for AI and ML applications, the role of Airflow has never been more critical.
In my journey as the Senior Engineering Director and a pivotal member of Apache Airflow's Project Management Committee (PMC), I've witnessed Airflow transform data handling, making agility and insight the norm in an ever-evolving digital space. At Astronomer, our collaboration with leading AI & ML teams worldwide has not only tested but also proven Airflow's mettle in delivering data reliably and efficiently—data that now powers not just insights but core business functions.
This session is a deep dive into the essence of Airflow's success. We'll trace its evolution from a budding project to the backbone of data orchestration it is today, constantly adapting to meet the next wave of data challenges, including those brought on by Generative AI. It's this forward-thinking adaptability that keeps Airflow at the forefront of innovation, ready for whatever comes next.
The ever-growing demands of AI and ML applications have ushered in an era where sophisticated data management isn't a luxury—it's a necessity. Airflow's innate flexibility and scalability are what makes it indispensable in managing the intricate workflows of today, especially those involving Large Language Models (LLMs).
This talk isn't just a rundown of Airflow's features; it's about harnessing these capabilities to turn your data workflows into a strategic asset. Together, we'll explore how Airflow remains at the cutting edge of data orchestration, ensuring your organization is not just keeping pace but setting the pace in a data-driven future.
Session in https://budapestdata.hu/2024/04/kaxil-naik-astronomer-io/ | https://dataml24.sessionize.com/session/667627
Build applications with generative AI on Google CloudMárton Kodok
We will explore Vertex AI - Model Garden powered experiences, we are going to learn more about the integration of these generative AI APIs. We are going to see in action what the Gemini family of generative models are for developers to build and deploy AI-driven applications. Vertex AI includes a suite of foundation models, these are referred to as the PaLM and Gemini family of generative ai models, and they come in different versions. We are going to cover how to use via API to: - execute prompts in text and chat - cover multimodal use cases with image prompts. - finetune and distill to improve knowledge domains - run function calls with foundation models to optimize them for specific tasks. At the end of the session, developers will understand how to innovate with generative AI and develop apps using the generative ai industry trends.
STATATHON: Unleashing the Power of Statistics in a 48-Hour Knowledge Extravag...sameer shah
"Join us for STATATHON, a dynamic 2-day event dedicated to exploring statistical knowledge and its real-world applications. From theory to practice, participants engage in intensive learning sessions, workshops, and challenges, fostering a deeper understanding of statistical methodologies and their significance in various fields."
Codeless Generative AI Pipelines
(GenAI with Milvus)
https://ml.dssconf.pl/user.html#!/lecture/DSSML24-041a/rate
Discover the potential of real-time streaming in the context of GenAI as we delve into the intricacies of Apache NiFi and its capabilities. Learn how this tool can significantly simplify the data engineering workflow for GenAI applications, allowing you to focus on the creative aspects rather than the technical complexities. I will guide you through practical examples and use cases, showing the impact of automation on prompt building. From data ingestion to transformation and delivery, witness how Apache NiFi streamlines the entire pipeline, ensuring a smooth and hassle-free experience.
Timothy Spann
https://www.youtube.com/@FLaNK-Stack
https://medium.com/@tspann
https://www.datainmotion.dev/
milvus, unstructured data, vector database, zilliz, cloud, vectors, python, deep learning, generative ai, genai, nifi, kafka, flink, streaming, iot, edge
1. The Length of Contracts and Collusion
Richard Green and Chloé Le Coq*
University of Birmingham
University of California Energy Institute and Stockholm School of Economics
Department of Economics, University of Birmingham, B15 2TT, UK
Tel +44 121 415 8216
Fax +44 121 414 7377
Stockholm School of Economics, SITE, Box 6501, S-113 83 Stockholm, Sweden
October 2007
Many commodities (including energy, agricultural products and metals) are sold both on
spot markets and through long-term contracts which commit the parties to exchange the
commodity in each of a number of spot market periods. This paper shows how the length
of contracts affects the possibility of collusion in a repeated price-setting game.
Contracts can both help and hinder collusion, because reducing the size of the spot
market cuts both the immediate gain from defection and the punishment for deviation.
Firms can always sustain some collusive price above marginal cost if they sell the right
number of contracts, of any duration, whatever their discount factor. As the duration of
contracts increases, however, collusion becomes harder to sustain.
Keywords: long-term contracts, collusion, competition in prices
JEL: D43, L13
*
Support from the Leverhulme Trust, through the award of a Philip Leverhulme Prize to Richard Green, and
from the Jan Wallander and Tom Hedelius Foundation to Chloé Le Coq, is gratefully acknowledged. We would
like to thank the MIT Center for Energy and Environmental Policy and the University of California Energy
Institute for their hospitality and their support. We thank Sven-Olof Fridolfsson, Juan-Pablo Montero, Karen
Notsund, Yannick Viossat and two anonymous referees as well as seminar and conference participants at the
University of Birmingham, UCEI, and IIOC 06 (Boston) for helpful comments.
Emails: r.j.green@bham.ac.uk; Chloe.LeCoq@hhs.se
Manuscript
2. 1
1 Introduction
Many commodities are sold both through long-term contracts and on spot markets. Empirical
evidence suggests that most forward contracts last for many spot market trading periods. For
example, two-thirds (by volume) of the gas trades reported in Britain on December 3, 2004 were
for deliveries spread over a month or more, as were more than 90% of the electricity trades
(Heren, 2004a,b). Fifty percent of California winegrape producers have contracts of more than
one year with an average length of 3.5 years, the most frequent contract lengths being 3, 5 and 10
years (Goodhue et al., 1999). In the U.S. agricultural industry, many contracts are signed for 3
months (20% for cattle and 35% for poultry) or for 3-12 months (80% and 49% respectively)
(USDA, 1993). For non-ferrous metals traded on the London Metal Exchange similarly, contracts
range from one day to many years (Slade and Tille, 2004 or www.lme.com).
The seminal result on the interaction between spot and forward markets (Allaz and Vila,
1993) is that the presence of a forward market will make the spot market more competitive –
firms are competing only over the unsold portion of the overall demand, and face a more elastic
residual demand curve. More recently, however, some authors have suggested ways in which
forward markets could be used to make the spot market less competitive. One possibility is that
firms could buy in the forward market to increase their exposure to the spot market, and make
their residual demand less elastic (Mahenc and Salanié, 2004). Another is that contracts could
increase the likelihood and severity of collusion (Ferreira, 2003, Le Coq, 2004, Liski and
Montero, 2006). The key intuition of these papers is that a firm which defects from a collusive
agreement will not be able to capture the demand already covered by contract sales. Compared to
the case with no contracts, this reduces the gains from defection without changing the
punishment path, and therefore makes collusion easier to sustain. An important feature of these
papers is that the contracts studied only last for a single spot period.
The aim of this paper is to investigate how the length of forward contracts (i.e. the
number of spot periods with delivery commitment) affects the firms’ ability to collude on the
spot market. We show that the longer the contracts last, the more difficult it is to sustain
collusion. At the same time, however, every firm can sustain some collusive price above
marginal cost for any length of contracts. This includes firms that would not be able to collude in
3. 2
the absence of contracts – we show that they will need to cover a high proportion of their output
with contracts to make collusion possible.
The mechanism works as follows. We adapt the setting used in Liski and Montero (2006)
where firms repeatedly alternate between selling contracts and competing in price on the spot
market, but with several spot periods between each round of forward trading.1
A contract is thus
an agreement where a firm (buyer) commits to sell (to buy) a fixed quantity at a fixed price in
each of a number of spot market periods. The length of the contract is defined as the number of
spot periods for which the agreement stands, and is set exogenously. Assume that firms collude
on a price above marginal cost with a trigger strategy. Any contract reduces the demand to be met
in the spot market, reducing the short-term gain from defection, and therefore makes collusion
more attractive. The contracts affect the payoff during the punishment phase, however. As soon
as deviation occurs, the punishment is to offer the competitive price in the spot market in every
period afterwards, and sell contracts at this price from the next contract round onwards. This
punishment immediately affects profits in the spot market, but the deviating firm still receives
profits from its contracts, until the next contract round. While the defecting firm cannot take
away the sales its rival has covered by contracts in the period in which it defects, its rival cannot
take away the sales the firm has covered by contracts made before the defection. This reduces the
severity of the punishment that can be inflicted for defection. The longer the contracts last for,
the greater the reduction of the punishment. The contracted quantities act as a “protection” during
the length of the contract. The paper discusses how these two effects – the lower gain from
deviation and the reduced punishment afterwards – interact as the length of the contracts varies.
We call the first effect the “gain-cutting effect” and the second the “protection effect”.
While we are not aware of other papers that have paid attention to the length of the
contract in an oligopolistic game, Liski and Montero (2006) briefly consider what would happen
if firms traded one-period contracts many periods in advance, which is in some ways equivalent
to trading a multi-period contract. They point out that in these later periods, the contracts
1
The terminology used for forward market and spot market can differ between industries. In some industries there is
no obvious spot or forward market, but short-term and long-term contracts coexist. Our model is applicable to the
interaction between sales of short-term and long-term contracts in these industries, as well as to those in which there
is a (more or less) organised spot market. However, we will always use the term “spot” market to refer to the short-
term market and forward contract to refer to the longer-term commitments.
4. 3
actually make collusion harder to sustain, and so the firms would not want to sell contracts so far
in advance that they were unable to collude. If each period has its own contract, this is easy to
achieve. Their paper therefore naturally concentrates on the key result that short-term contracting
makes collusion easier, and demonstrates this result with collusive paths supported by contracts
sold a single period in advance.
In practice, firms may not be able to choose exactly how far in advance (or for how long)
they sell their output. Market conventions generally dictate that forward contracts will last for a
week, a month, a quarter or a year. Moreover, liquidity is concentrated in the contracts which are
closest to delivery. We therefore assume that a firm cannot manufacture, say, an eleven-month
contract by selling a year-long contract and simultaneously buying an identical contract for the
final month of that year. The firm might be able to unwind part of its commitment later in the
year, once there is more liquidity in the market for the final month. This would only affect the
firm’s payoffs if it happened before a deviation has occurred, however, and we will show that
any deviation will take place at the start of the contract’s life. The firms in our model have to
take the length of contracts as given, but still wish to maintain a collusive equilibrium.
We are considering forward contracts for physical delivery, which remove part of the
market demand from a defecting firm. If the firms had sold contracts that are financially settled,
such as most futures contracts, the defector would still be able to cover the entire physical market
demand at a defection price below the collusive price. Furthermore, the defector would still
receive the higher price on that part of their output covered by contracts, raising their deviation
profits, relative to the situation with no contracts.2
Financially settled contracts therefore make
collusion harder than the forward contracts we study.
With different contract lengths and an infinitely repeated game we offer a general setup
described in the next section. In section 3, we give the general conditions for collusion to be
sustainable. Section 4 shows how the discount factor needed to sustain the collusive price varies
with the proportion of the collusive output covered by contracts, and the duration of those
contracts. This allows us to demonstrate the two effects at work. Section 5 discusses how the
collusive price varies with the discount factor, the proportion of output sold through contracts,
and their duration, and shows that firms can maintain some collusive price above marginal cost
5. 4
for any positive discount factor, given appropriate contracts. Section 6 illustrates our results by
using a linear demand example. Section 7 concludes.
2 The model
Consider two firms, 1 and 2, who produce a homogeneous good with a constant marginal cost c
and no capacity constraints. They can sell their good on either the contract market or the spot
market. The firms have a common discount factor, G.
Timing. Firms compete in price repeatedly on the spot market (taking place in all periods t
=1,2,3,...). There is a contract round, which takes no time, before the first spot period. The
contracts sold in this round will last for 0M spot periods. As soon as they expire, there is
another contract round, followed by O spot periods, and so on.3
Demand. In each period, the demand is given by D(p), which is a decreasing and continuous
function of the spot price p. This demand can be met either by sales in the spot market or by
commitments made under forward contracts. The price paid for forward contracts does not affect
this demand – if the prices differ, buyers effectively receive a lump sum gain or loss from their
contract holdings, but there is no income effect.
Contract market. In each contract round, the two firms simultaneously choose the amount of
forward contracts they want to sell in the forward market that call for delivery of an equal volume
in each of the next O spot periods. Payment is made at the time(s) of delivery, avoiding the need
to use different amounts of discounting for spot and contract sales. It is convenient to work in
terms of the proportion of output sold in the contract market, rather than its volume. We define
x[0,1] as the proportion of contract sales, relative to the total output the firm would sell in the
2
This distinction is also noted by Liski and Montero (2006), footnote 5.
3
Our main qualitative results would also hold if contracts were traded before every spot period, with 1/O of the
stock being renewed each time. The gain-cutting effect would be unchanged, while the protection effect would be
weakened, as the number of contracts held during the punishment phase would fall continuously. In practice,
however, many industries have contracts which start on standard dates, such as the first day of the month, which fits
the simpler formulation we use. The qualitative results would also hold if some contracts were traded further in
advance (e.g. March contracts were traded in January), but the protection effect would be greater, lasting until all the
contracts already signed at the time of a deviation had expired.
6. 5
collusive equilibrium (spot and forward sales).4
We treat O and x as fixed exogenously, although
they could be chosen as part of a collusive agreement. The firms’ contract positions become
common knowledge at the end of each contract round (i.e., before the first spot period for which
those contracts apply).
No arbitrage. We assume that the contracts will only be accepted by purchasers if the contract
price is equal to the expected price in the spot market. In other words, the firms will be able to
sell contracts at a particular collusive price, if and only if they will be able to sustain this price in
the spot market, given their discount factors and contract sales.
Spot market. In each spot period, the firms simultaneously bid prices, and the firm with the
lower price serves the entire spot demand – the total demand at that price, less the forward
commitments by each firm. If this would be negative (demand at the spot price is less than the
forward sales), there are no spot market transactions.5
We assume an efficient-rationing rule; if
the firms submit the same price bid, they share the spot demand equally.
General profit functions. Aggregate profits are given by
p p c D pQ and are
assumed to be single peaked with a unique maximum at
m
pQ . Let
m m
pQ Q denote the
per-period profit earned by a monopoly firm. Let
c c
pQ Q denote the per-period profit
earned by each firm from collusion at the price pc
. And finally d
Q denotes the firm’s profit during
the deviation period, taking its spot and contracted output together.
3. Sustaining Collusion
We restrict our attention to stationary collusive agreements supported by trigger strategies. This
greatly simplifies the analysis and its exposition and does not restrict the scope of the results. 6
4
We follow Liski and Montero’s notation, but we do not allow for over-contracting or forward purchases, requiring
that x[0,1].
5
This will not be the case in equilibrium, or along the deviation paths we consider, but we state it for completeness.
6
Players revert to the static Nash equilibrium and remain there forever after any deviation. Exactly as in a repeated
Bertrand competition, unrelenting trigger strategies are optimal punishments in our setting, since the players are at
their security levels. Expressed differently, no complex punishment mechanism can enlarge the set of sustainable
equilibria (Abreu, 1986).
7. 6
In the first contract round, each firm offers long-term contracts to sell xD(pc
)/2 at the collusive
price pc
, where D(pc
)/2 is the output it would produce if it shared the (overall) market equally at
this price. If both firms have followed the collusive equilibrium so far, then in each spot period,
the firm will bid a spot price of pc
, sharing the spot market demand equally with the other firm.
If at any point in time anyone is detected cheating in any previous contract round or spot period,
then both firms will bid marginal cost, c, in each subsequent spot period. In every subsequent
contract round after a deviation has occurred, the firms will sell an arbitrary volume of contracts,
at the same price, c, as long as their combined sales do not exceed the market demand at
marginal cost, D(c).
We now investigate whether these strategies can sustain collusion against an optimal
deviation. In principle, a firm can deviate by either increasing its forward sales on the contract
round or undercutting its spot price. Deviating during the contract round is never optimal, as
shown by Liski and Montero (2004). Contracts are fully observable, and buyers know the firms’
strategies. If one firm deviates in a contract round, the spot price in every succeeding spot period
will be equal to c. Knowing this, no buyer would pay more than c in the forward market to a
seller that is attempting to deviate from its collusive strategy. The profit from deviation will thus
be zero. Any collusive strategy that gives a profit of more than zero is thus proof against
collusion occurring in a contract round. We can then state:
Lemma 1. It is never optimal to deviate during a contract round.
Thus, we need only to concentrate on deviations in the spot market. If there were no contracts, by
slightly undercutting ,c m
p c p‰ , a firm can earn approximately the aggregate collusive profit.
Given that at the opening of the spot market in period t there is an already secured supply of
c
xD p units coming from firms’ forward obligations signed in the most recent contract round,
this may not be the optimal deviation in our model. If the residual demand in the spot market is
too low, pc
may be above the monopoly price associated with that demand, and hence too high to
be an optimal deviation.
8. 7
Define pRm
as the monopoly price associated with the residual demand7
, and given by
, arg maxRm Rm c c
p p x p p c D p xD p w (1)
The optimal deviation price is then defined as
( , ) min sup ,d d c c Rm
p p x p p p p p ¯ w ¡ °¢ ±
(2)
The firm’s spot market profits from charging the optimal deviation price are given by sd
Q , where
, ,sd sd c d d d c
x p p p c D p xD pQ Q (3)
The firm’s total profits in the spot period during which it deviates are thus equal to
( , , )d d c d sd c
x p p xQ Q Q Q
9. (4)
In the punishment phase, starting just after the deviation period, the firms offer c on the spot
market forever and offer forward contracts at that price in all following contract rounds. As a
result, every subsequent spot profit is equal to zero. However, until the current contracts expire,
firms still sell their contracted quantities at the collusive price, pc
. The punishment does not
affect those quantities until the next contract round starts.
This affects the optimal timing of a deviation. The present value of the profits from
collusion continued forever equals Sc
/(1–G) in any spot market period. This includes profits of
xSc
from forward sales and (1-x) Sc
from sales in the spot market. The present value of the profits
from a deviation depends on the number of spot market periods remaining before the next
contract round. Consider a deviation with ^1,2,...U M‰ periods remaining until the next
contract round. We can write the profits during the punishment phase starting after the deviation
period, discounted to the deviation period, as
1
1
c t
t
x
U
Q E
œ . The present value of the overall
profits from deviation is thus equal to
1
deviation d c
PV x
U
E E
Q Q
E
10. (5)
This allows us to state:
Lemma 2. A deviation is the most profitable when it occurs in the spot period immediately after
a contract round.
7
We assume that
c
p c D p xD p is a single peaked function with a unique maximum pRm
.
11. 8
Proof: Immediate, from inspection of equation (5), which is maximised when W is at the highest
possible value, implying U M . Since the profits from continued collusion do not depend on
time, choosing the highest level of deviation profits is sufficient to choose the best time to
deviate. Ŷ
Using the one-stage deviation principle for infinite-horizon games, the collusive agreement
described above is sustainable as a subgame-perfect equilibrium as long as neither firm has an
incentive at any period to defect unilaterally from the collusive agreement. The punishment phase
(i.e., reversion to marginal cost forever) is subgame perfect, so we need to find the condition
under which deviation from the collusive path is not profitable for either firm. Setting U M in
equation (5), this condition is equivalent to
1 1
c
d c
x
M
Q E E
Q Q
E E
p
12. (6)
The first part of the RHS of the inequality (6) gives the first-period deviation profit, which
includes both profit from the residual spot demand and the forward sales in the deviation period.
The second part of the RHS gives the profits that the firm will obtain from its forward sales after
the deviation occurs until the period immediately before the next contract round.
We can use the fact that d sd c
xQ Q Q
13. to rewrite equation (6) as:
1 1 1c sd
xM
E Q E Q ¯ p ¢ ± (7)
Let us define
, , , 1 1 1c c sd
h x p xM
M E E Q E Q ¯ ¢ ± (8)
We define the minimum discount factor as
, , c
x pE E M such that
, , , 0c
h x pM E . Hence
we can state
Proposition 1. The grim trigger strategies described above constitute a subgame perfect
equilibrium if and only if
, , c
x pE E Mp , where
, , , 0c
h x pM E .
Proof. The collusion is sustainable for any discount factor satisfying inequality (7). From the
definition of h (equation (8)), we know that this is equivalent to
, , , 0c
h x pM E p . We also
have:
15. s
(9)
This implies that any discount factor greater than E will give 0h . Ŷ
Proposition 1 sets out the sufficient condition for a collusive equilibrium. In the following
sections, we discuss its implications, concentrating first on the interaction between the minimum
discount factor and the length of contracts, and second on the price that can be sustained through
collusion.
4. The critical discount factor
Why does the level of forward contracting affect the critical discount factor at which collusion
can just be sustained? There are two effects playing in opposite directions. First there is a pro-
collusive effect (captured by the variable d
Q in the inequality (6)) which we call the gain-cutting
effect. Second there is a pro-competitive effect (captured by the term( ) (1 ) c
xM
E E E Q in the
inequality (6)) which we call the protection effect.
Assume that firms have signed contracts ( 0x ). A firm which defects from a collusive
agreement will not be able to capture the demand already covered by contract sales. This reduces
the gains from defection, for a given collusive price and discount factor, allowing the firms to
sustain a higher collusive price, or making collusion possible with a lower discount factor. We
say that the forward sales have a gain-cutting effect that increases with the amount of forward
sales (because we have 0d
xQs s ). The more forward sales there are, the less the deviation
profit is, which tends to make it easier to collude.
Forward sales can have a second impact on collusion, however, if they last for more than
one period. While the defecting firm cannot take away the sales its rival has covered by contracts
in the period in which it defects, its rival cannot take away the sales the firm has covered by
contracts made before the defection. Hence if O 1, a firm that defects in the first spot period
after a contract round will continue to receive the fixed forward price for part of its output, until
the next contract round occurs. This reduces the severity of the punishment that can be inflicted
16. 10
for defection. The longer the length of the contracts, the greater this reduction, and the more
protected are the firms. This protection effect increases with the length of the contract (since the
coefficient ( ) (1 )M
E E E increases in O) as well as with the contracted quantity.
It is important to notice that the two effects do not play at the same time. The gain-cutting
effect appears (during the deviation period) before the protection effect. Moreover the gain-
cutting effect always exists as soon as 0x , while the protection effect only appears when
1M . The overall impact on the sustainability of collusion depends upon the interaction of the
two effects.
We now explore how the minimum discount factor E varies with the length of the
contract (O) and with the contracted quantity (x). Before exploring the general results of
Proposition 1, we discuss two simple examples that allow us to relate to previous literature.
No contracting case (Repeated Bertrand game). Assume that firms hold no contracts
0x and
agree to collude on the monopoly price; the game is identical to the traditional repeated price game.
By sticking to the agreement, a firm receives /2m
Q which corresponds to half the aggregate
monopoly profit. When 0x , the optimal deviation is to undercut the collusive price by a
fractional amount, capturing the entire market demand at this price, and obtaining twice the
collusive profit in that period. In all future periods, the unilateral deviation triggers retaliation from
the other firm. As a result, in all subsequent periods firm i earns the static Nash equilibrium profits,
that is
0cQ . We can rewrite the inequality (7) as
21
m mQ QE p . From Proposition 1, if
there are no contracts, firms can sustain the monopoly price if their discount factor is ½ or more,
and cannot sustain any price above marginal cost for any lower discount factor (Tirole, 1988). With
no contracting, neither the gain-cutting effect nor the protection effect exists.
One period contracting case. Assume firms offer one-period contracts ( 0x and 1M ) and
agree to collude on the monopoly price pm
, so that 2c m
Q Q . It is straightforward to show that
whenever x0 and c m
p p the optimal deviation price is the residual monopoly price pRm
defined
by equation (1). Since contracts only last for one period, the punishment phase starts immediately
after the deviation period. As a result, in all subsequent periods firm i earns the static Nash
17. 11
equilibrium profits, that is
0cQ , and there is no protection effect. Collusion is sustainable
whenever (1 )m sd m
xQ E Q Q p
18. . Recall that from equation (3) we have
2 1sd m
xQ Q ,
and so the condition can be rewritten as 1 (1 ) 2 xE p . Since the gain-cutting effect becomes
stronger as the level of contracting rises, the critical discount factor is strictly decreasing in the level
of one-period contracting. This explains the main result with one-period contracting (studied first
by Liski and Montero, 2006): forward trading allows firms to sustain collusive profits that
otherwise would not be possible. When we allow for longer contract lengths this result does not
always hold.
General case. For any length of the contract (O), we have:
Proposition 2. The critical discount factor is strictly increasing in the length of the contract.
Proof. We can write the partial derivative of h with respect to G as 1 c sd
h xM
E ME Q Q
19. , which
is clearly positive for prices above marginal cost. The partial derivative of h with respect to O is
ln 0c
h x M
M Q E E , since 1G . By the implicit function theorem, we have
d d h hM EE M . Using the above inequalities we can conclude that the critical discount factor
E is strictly increasing in the length of the contract ( 0d dE M ).Ŷ
With one period contracting, the firm knows that in every period after its defection its profits will
be reduced to zero. Proposition 2 arises because if the contract lasts for more than one period
( 1M ), however, a firm that defects in the first spot period after a contract round will continue
to receive the fixed forward price for part of its output, until the next contract round occurs. This
reduces the severity of the punishment that the firm will receive – the longer the contracts last,
the less the firm’s profits will be reduced. Hence the greater the length of the contract, the longer
the firm is protected against harsh punishment. This increases the temptation to deviate.
Proposition 3. The critical discount factor may rise or fall as the proportion of contracted
output increases.
20. 12
Proof. We have
1 1 /c sd
xh xM
E Q E Q s s , and note that / 0sd
xQs s , since
increases in contract cover reduce the residual demand available in the spot market to a deviating
firm. It is easy to show that depending on the values of x, pc
, O and G, the function hx can be
positive or negative. In Section 6 we give examples of these cases when demand is linear. By the
implicit function theorem, we have xd dx h hEE . This implies Proposition 3. Ŷ
The reason for this result is that the level of contracted output influences both of our effects.
When the contracted quantity increases, the residual demand decreases and therefore the gains
from deviation are lower (the gain-cutting effect becomes stronger). At the same time, when the
contracted quantity increases, the forward profit increases, implying that the protection effect
becomes stronger. This gives more incentive to deviate from the collusive agreement. Since the
two effects are working in opposite directions, we get an ambiguous overall impact on the
sustainability of collusion.
5. The level of the collusive price
To explore the impact of the level of the collusive price upon the sustainability of collusion, we
start by asking whether firms would deviate with a small or a large reduction in the spot price.
We already defined
,d c
p x p as the optimal deviation price given pc
and x where
^, min , ( , )d c c Rm c
p x p p p x pF .
Note that the residual monopoly price strictly falls with x and strictly rises with pc
.
Moreover
0,Rm c m
p p p ,
1,Rm c c
p p p , and
1,Rm
p c c . By continuity, it follows
that there exists a unique
*
0,1c
x p ‰ such that
*
,Rm c c c
p x p p p .
Assume that
,Rm c
p x p is differentiable with
,
0 0,1
Rm c
p x p
x
x
s
‰
s
(10)
and
21. 13
,
0 ,
Rm c
c m
c
p x p
p c p
p
s
‰
s
(11)
Furthermore:
, 0, *
, *,1
c Rm c
c Rm c
p p x p x x
p p x p x x
£ b ‰¦¦¦¤
¦ ‰¦¦¥
. (12)
If the collusive price is high and the level of contracting is low, the residual monopoly price will
be greater than the collusive price. In that case, the optimal deviation will be to undercut the
collusive price by a small amount, as it is when firms are trying to collude on the monopoly price
with no contracts.
We can rewrite the definition of the optimal deviation price as follows:
*
,
, *
c c
d d c
Rm c c
p if x x p
p p x p
p x p if x x p
F£ b¦¦¦ ¤
¦ ¦¦¥
(13)
where
* 0m
x p ,
* 1x c and
*
0
c
c
x p
p
s
s
.
Figure 1 shows the two regions, in which deviating with a price slightly under pc
and by setting
pRm
is optimal. We call these region 1 and region 2, respectively. We plot the frontier between
these two kinds of deviation, by equating pc
and pRm
. It leaves the vertical axis at pm
, and reaches
a value of 1 at a price of c. We had already seen that slightly undercutting ,c m
p c p‰ is
optimal when there were no contracts. The right-hand end of the line implies that this is also the
case when the collusive price is close to marginal cost, unless there is a very high degree of
contracting. Covering more output with forward sales makes the residual demand in the spot
market more elastic, favouring a lower deviation price. Setting a lower collusive price makes the
residual demand at that price less elastic, favouring a high deviation price.
Figure 1 about here.
The distinction between these two regions is important, because the firm’s spot market profits
after deviation are different. In both regions, the firm’s forward profits are equal to f c
xQ Q ,
and its spot market profits from collusion are equal to
1s c
xQ Q . In region 1, the optimal
22. 14
deviation of slightly undercutting pc
gives the firm double the spot market profits that it would
gain from collusion. We use this straightforward relationship in the proof of:
Proposition 4: For any positive discount factor and any length of contracts, given an
appropriate level of forward contracting a firm can sustain collusion at some price above
marginal cost.
Proof. To prove Proposition 4, it is enough to show that there exist a pair
,c
p x in Region 1 and
a discount factor 0,1E ‰ such that collusion at c
p c is sustainable. In region 1, by slightly
undercutting pc
the deviating firm receives
2 1sd c
xQ Q as its spot market profits. From
equation (7), collusion is sustainable if and only if
2
1 1
c
c c
x x
M
Q E E
Q Q
E E
p
23. . We can
rewrite this inequality as
1 1 2 0x xM
E E E , which is equivalent to
2 1 1 0x x M
E E
24. . The last inequality is always true for 1/2E or if
1 2 1x xM
E E (14)
Note that as x goes to 1, the above inequality is true for any G 0, whatever the value of O. Ŷ
This proposition shows that forward contracts make it possible for firms to maintain some
level of collusion at a price above marginal cost, however long those contracts last for, and however
low their discount factor. Without contracts, collusion would only be possible for a discount factor
of ½ or more, and so this result implies that contracts can have a pro-collusive effect, just as for
Liski and Montero (2004). It is worth pointing out, however, that if the discount factor is low, or O
is large, a high level of contract cover will be required. The proof, which is based on a sufficient but
not a necessary condition, requires that the firm is in region 1, implying that pc
must not be too high
for the level of x, and that the highest pc
falls as x rises.
We define the maximum sustainable collusive price as
, ,c c
p p x M E such that
, , , 0c
h x pM E .Within region 1, the level of the price does not affect the sustainability of
collusion, implying that the highest sustainable price must be (weakly) within region 2. This in
25. 15
turn implies that the deviation price is set by maximising profits, given the residual demand in
the spot market, rather than by slightly undercutting c
p . We will use this in the proof of:
Proposition 5: Assume that 2 2
( )/ 0D p pw w . The maximum sustainable collusive price is
increasing in the discount factor.
Proof. Consider the maximum collusive price c
p .
By the implicit function theorem, we have
c
c
pp h hEEs s . We have
1 1 (1 )c
c sd
p c ch x
p p
M Q Q
E E
s s
s s
. Since
, , , 0c
h x pM E , we have
1 1 (1 )
sd
cxM Q
E E
Q
, and so
(1 )c c
sd c sd
p c c cp
h
p p
Q Q Q
E
Q
¬s s ž ž ž s sŸ ®
.
With
2 2
c c c c
c c
p c D p D p
p p
Qs s
26. s s
and
sd c
d
c c
D p
p c x
p p
Qs s
s s
, we then have
(1 )c c
d d cc
d
p c c cp
D p D p xD pD p
h p c
D p p p c
E
¬s ž
27. ž ž ž s Ÿ ®
.
Since we are in region 2, and Ssd
(given in equation (3)) has been maximised with respect to pd
,
we know that
0
d
d c d
d
D p
D p xD p p c
p
s
28. s
This gives us:
(1 )c c
d dc d c
d
p cc c c dp
D p D pD p p c D p
h p c
pp D p p c p
E
¯ss s¡ °
¡ °ss s¢ ±
Since d c
p pd , the first fraction in the square brackets is greater than one, and the second fraction
is less than one. Since ( )/ 0D p pw w and 2 2
( )/ 0D p pw w , the ratio of the two derivatives is also
less than one. The term in square brackets is therefore positive, and 0c cp p
h . Recalling that
0hE , we can conclude that the maximum sustainable price is strictly increasing in the critical
discount factorE .Ŷ
We can also prove:
29. 16
Proposition 6: Assume that 2 2
( )/ 0D p pw w t . The maximum sustainable collusive price is
decreasing in the length of contracts.
Proof. Consider the maximum collusive price c
p .
By the implicit function theorem, we have
c
c
pp h hMMs s . Recalling that 0hM and 0c cp p
h , we can conclude that the
maximum sustainable price is strictly decreasing in the length of contracts M .Ŷ
Proposition 7: The maximum sustainable collusive price may fall or rise as the proportion of
output covered by contracts rises.
Proof. By the implicit function theorem, we have c
c
x pp x h hs s . It is easy to show that
depending on the values of x, c
p , M and G, the function hx can be positive or negative. In
Section 6 we give examples of these cases when demand is linear. This implies Proposition 7. Ŷ
In the next section, we use a linear example to illustrate the relationships between the length of
the contract, the maximum sustainable price, the discount factor and the amount of contracted
quantity.
6. A linear demand example
We give an example of the interaction of the level of contract cover, the contract length, the
discount factor, and the collusive price, by considering the same linear demand as Liski and
Montero (2004). The total demand for the good is given by a – p, where p is the price in the spot
market. In addition, we denote the price, quantity and profit associated with the one-period
monopoly solution by pm
= (a+c)/2, qm
= (a-c)/2 and Sm
= (pm
– c) qm
= (a – c)2
/4, respectively.
Assume first that the firms collude on the monopoly price, so that c m
p p . It is easy to show
that the monopoly price associated with the residual demand is given by
2
m
Rm a c xq
p
30. .
We can insert these, and the other relevant formulae, into equation (7) and obtain:
31. 17
Proposition 8: Collusion at the monopoly price can be sustained through the use of grim trigger
strategies, if and only if
2 2
2 2 1 1x x xM
E E
33. .
It is interesting to note that with full contracting (x = 1), the condition becomes
2 1M
E E
34. p . For 1M , this gives us 1/3E p , as in Liski and Montero (2004). With
= 2M and x = 1, the critical discount factor is again ½, just as if no contracts had been sold.
The gain-cutting effect is exactly compensated by the protection effect. Figure 2 shows how the
critical discount rate varies with x and the duration of the forward contracts. The two lowest
lines, for contracts lasting one or two periods, are everywhere weakly below ½, confirming that
these short-lived contracts make collusion easier to sustain. The lines for contracts lasting for
three or more periods, however, rise above ½ at their right-hand ends. The top line shown,
representing contracts lasting for 30 spot periods (which might imply a month-long contract
overlying a spot market repeated each day), shows that the critical discount rate rises to more
than 0.9 if the firms are fully contracted.
Assume now that the firms collude on ,c m
p c p‰ . It is also possible, with some algebra,
to calculate the maximum sustainable collusive price for values of x, G and M . We insert
expressions for the collusive profits and the deviation profits in the spot market into equation (8):
42. ž žŸ ®
(16)
We plot the results in Figures 3 to 5. These show how the maximum sustainable prices vary with
the absolute volume of contracted sales, for different discount factors and three contract lengths –
one period, two periods, and four periods. The figures are calibrated for 8a and 0c , so
that the monopoly price is equal to 4. The horizontal dashed line shows this price. Because we
43. 18
are plotting the absolute volume of sales, rather than x, on the horizontal axis, we can also show
the firm’s total output at a given collusive price, assuming that it is sharing the market equally.
This is given by the dotted line, which can also be described as a half-demand curve (it shows
half of the market demand). The line with dots and dashes is the border between region 1 (below
the line - undercut the collusive price by F) and region 2 (above the line – undercut by charging
the residual monopoly price). With linear demand and constant costs, this border is also linear.
The solid lines give the frontier linking the highest sustainable collusive price and the
level of contracted output, for a range of discount factors. In each case, prices below and to the
right of the frontier (and to the left of the half-demand curve) are also sustainable.
Figure 3 shows that when contracts last for a single spot period, firms with a discount
factor of ½ or more can sustain collusion at the monopoly price, whether or not they sell any
contracts. Firms with a discount factor of between ½ and ѿ FDQ VXVWDLQ WKH PRQRSRO SULFH LI
they have covered enough of their output with forward contracts. For example, a firm with a
discount factor of 0.4 will be able to sustain the monopoly price if it sells one unit in the forward
market, at point A, but it would not be able to sustain a price of 1, at point B. At this lower price,
the single unit sold in advance would be too small a proportion of the firm’s overall sales. From
equation (14), with G = 0.4 and M = 1, collusion is sustainable if 1
3x p . Contract sales of 1 unit
would give 1
2x at a price of 4 (for the firm would have total sales of 2), but x = 0.29 at a
price of 1, when the firm would be selling 3.5 units. Finally note that firms with a discount factor
of less than ѿ FDQQRW VXVWDLQ WKH PRQRSRO SULFH EXW ZLOO EH DEOH WR VXVWDLQ SULFHV DERYH
marginal cost if they sell in the forward market.8
Figure 3 about here.
Figure 4 shows that firms with a discount factor of more than ½ can sustain collusion at
the monopoly price for any level of contract cover, when the contracts last for two spot market
periods. With a discount factor of ½ or less the frontiers are shifting downwards and to the right,
8
Note that in region 1 (the area below the line of dots and dashes) the frontiers are bounded by straight
segments – if extended, these would all converge on the vertical axis at a price of 8, the value taken by a
in our example. This is also the case in figures 4 and 5, and would be for any other value of O.
44. 19
showing that more cover is needed to make collusion sustainable, and that the maximum
sustainable prices are falling. Firms with discount factors of close to ½ can still sustain the
monopoly price for some levels of contract cover, however, and a frontier for a firm with
= 0.47E has been added to illustrate this.
Figure 4 about here.
Figure 5 illustrates the impact of contracts that last for four spot periods. With these
contracts, the maximum sustainable prices for firms with discount factors of less than ½ are
much lower, and only one case is shown on the figure. Without contracts, however, collusion
would not be possible at all. A firm with a discount factor of ½ could sustain the monopoly price
if it had no contracts, and could sustain a slightly higher price with a low level of contract cover –
although it should not want to, as the higher price would reduce its profits! As its contract cover
increases, however, the maximum sustainable price for this firm falls – if it covers all of its
output in the forward market, the maximum price is less than half of the monopoly price. A firm
with a discount factor of just over ½ will also have a non-monotonic frontier – it might maximise
its sustainable price with a small amount of contract sales. Firms with higher discount factors,
however, maximise their sustainable price if they do not sell any contracts, and the price that they
can sustain falls as their contract sales increase. A firm with a discount factor of 0.645 is (just)
able to sustain the monopoly price with full contracting.
Figure 5 about here.
Figures 3-5 clearly show propositions 2 – 7 in action. The frontiers rise with higher discount
factors, and fall as the length of the contracts increases. As contracts become longer, the
protection effect becomes more important, relative to the gain-cutting effect, and collusion
becomes harder to sustain for firms which would be able to sustain the monopoly price in the
absence of contracts. In the bottom right-hand corner, however, contracts allow firms with low
discount factors to sustain a collusive price, albeit a low one.
45. 20
Firms with higher discount factors can sustain higher collusive prices. As the length of
contracts increases, the highest sustainable price falls, or a higher discount factor is required to
maintain a given collusive price. As the proportion of output covered by contracts increases,
however, the highest sustainable price will sometimes rise, although it falls for high levels of
contract cover when M 1.
7. Conclusion
We have shown that long-term contracts have an ambiguous impact on collusion. In some cases,
they make collusion on a price above marginal cost possible when it would not be possible
without them. In other cases, collusion would be possible without contracts, but becomes
impossible (at a given price) as the level of contracting, or their length, becomes too great. We
have shown that this ambiguity is due to the interaction of two effects, the gain-cutting effect,
which reduces the immediate gain from defection, and the protection effect, which reduces the
amount of punishment that deviators can receive. These effects are implicit in the work of Liski
and Montero (2006), and we characterise them more fully in this paper.
We have taken the length of contracts, and the level of contracting, as exogenous. This
was to allow us to explore the impact of changing these variables, but does open the question of
how they would be chosen. Contracts will often last for a “natural” period of calendar time, such
as a week, a month or a year. In a competitive market, a particular contract design will only last if
it meets a need, and for the length of a contract, this implies a trade-off between the convenience
of not having to trade too frequently, and the ability to match a contractual position with a
physical one. For example, month-long contracts will be well-placed in a market where demand
does not change significantly from week to week, but does vary predictably over the course of a
year. In some electricity markets, regulators have mandated “vesting contracts” in the hope of
reducing incumbents’ market power at the start of competition. From the point of view of the
firms, their length is exogenous, but such contracts are not a permanent market feature.
The more interesting question is why firms would offer contracts if they make it harder
for the firms to collude. For some firms, the premise of the question is incorrect, for collusion is
46. 21
only possible if they have sold contracts, and in these circumstances, they would wish to sell the
amount of contracts that maximised the collusive price that they could achieve. Other firms,
however, will potentially lose out by selling contracts, assuming that the possibility of collusion
is in fact an attractive one for them. In a different model, with uncertain demand, covering some
output with forward contracts would reduce the variability of the firms’ profits. Hedging their
profits in this way might be sufficient motivation for them to sell contracts. That remains an area
for further research.
References
Abreu, D. (1986) Extremal Equilibria of Oligopolistic Supergames, Journal of Economic Theory
39, 191-225.
Allaz, B. and J-L Vila (1993) “Cournot Competition, Forward Markets and Efficiency”, Journal of
Economic Theory 59(1), 1-16.
Ferreira, J.L. (2003) “Strategic Interaction between Futures and Spot Markets”, Journal of
Economic Theory 108, 141-151.
Goodhue, R.E., Heien D.M. and H. Lee (1999) Contract Usage in the California Winegrape
Economy ARE Update 3(3),
Heren (2004a) European Daily Electricity Markets, WP 8.234
Heren (2004b) European Spot Gas Markets, WP 10.234
Le Coq C. (2004): Long-Term Supply Contracts and Collusion in the Electricity Market,
Stockholm, SSE/EFI Working Paper Series in Economics and Finance 552.
Liski, M. and J-P Montero (2006) “Forward Trading and Collusion in Oligopoly”, Journal of
Economic Theory 131, pp. 212-230.
Mahenc P., and F. Salanié (2004) “Softening Competition through Forward Trading”, Journal of
Economic Theory 116, 282-293.
Slade M. E. and H. Tille (2006) “Commodity Spot Prices: An Exploratory Assessment”,
Economica, 73, 229-256.
USDA (1993) Farm Cost Returns Survey
47. Figure 1: Deviation types
Portion of contracted quantity
1,Rm
p c c
c Rm
p p
Region 1
Price
Region 2
0,Rm c m
p p p
1
c Rm
p p
Figure 2: Critical discount factors to sustain collusion at the monopoly price, linear
example
0
0,1
0,2
0,3
0,4
0,5
0,6
0,7
0,8
0,9
0 0,2 0,4 0,6 0,8 1
30
=8
=4
=3
=2
=1
x
G O
Figure(s)
48. 1
Figure 3: Sustainable collusive prices with OO = 1, linear example
0
1
2
3
4
5
0 1 2 3 4 Contracted Quantity
G = ½
G = 0.4
G = 1/3
G = 0.15
Collusive Price
Region 1
Region 2
A
B
Half-demand
curve
pm
Figure 4: Sustainable collusive prices with O = 2, linear example
0
1
2
3
4
5
0 1 2 3 4
Collusive Price
G = ½
G = 0.4
G = 1/3
G = 0.47
Contracted Quantity
pm
Half-demand
curve
49. 2
Figure 5: Sustainable collusive prices with OO = 4, linear example
0
1
2
3
4
5
0 1 2 3 4
G = ½
G = 0.4
G = 0.645
G = 0.57
Contracted Quantity
Collusive Price
pm
Half-demand
curve