Due to the illegal status of cartels in the US, field data on collusion is seldom available, making it difficult to analyze collusion themes empirically. More importantly, with many exogenous and unobservable factors in field data, the task of identifying and estimating the effect of different market conditions on collusion becomes problematic. This doctoral dissertation is aimed at improving the understanding of the role of demand information and monitoring on cartel behavior through the analysis of data generated by controlled experiments that are designed to resemble various demand and monitoring conditions. This project will use the Laboratory for the Study of Human Thought and Action at Virginia Tech to conduct the experiments.
More specifically, this proposal consists of a series of experiments aimed at testing how different aspects of the market affect firms' ability to reach and sustain collusive outcomes. The project tests the role of demand information and monitoring on collusion. It is motivated by the importance these two market factors have had in the theoretical literature of cartel stability. Besides allowing for an assessment of the role of these factors on collusion, these treatments encompass the assumptions of two highly influential theories of cartel stability: Green and Porter (1984) and Rotemberg and Saloner (1986). Thus, this design permits tests of each theory's internal validity. This is an important feature since with field data there is no guarantee that observed firm behavior that appears to correspond to the predictions of a given theory is a result of the theory at work. In the case of collusion, the implications of internal validity can be of paramount importance; if a collusion theory passes simple tests in a controlled environment, then industry behavior that is in accordance with the predictions of the theory may be considered by authorities as stronger evidence for collusion. Finally, the project extends the experimental design to analyze how different degrees of demand volatility affect the results of our treatments.
The project will have the following broader impacts: (1) Provide policy makers, including the Department of Justice and the Federal Trade Commission, with a better understanding of how demand information and imperfect monitoring affect firms' ability to collude and attain higher profits. (2)Provide evidence of the market conditions under which price wars are a sign of collusion failure or an enforcement mechanism of an operating cartel. This may assist authorities in antitrust cases. (3) Improve knowledge on the role of demand volatility on firms' ability collude. (4) Serve as a starting point for the development of new theories that can better capture unexplained aspects of cartel behavior.
