Practices that (Credibly) Facilitate Oligopoly Co-ordination

Abstract

It is now well established in both the economic and legal literature that successful price co-ordination (either express or tacit) is not inevitable — even in highly concentrated industries protected by insurmountable barriers to entry. The key to this insight is the recognition that even though oligopolists’ fates are interdependent, individual self-interests are not perfectly consonant. As a result, oligopolists may find it difficult to agree on a mutually acceptable co-operative outcome, achieve that outcome smoothly, and maintain it over time in the face of exogenous shocks and private incentives to deviate. In the current language of industrial organisation, the joint profit-maximising point may not be a Nash equilibrium.

This work reflects the research and litigation skills of a number of my former FTC colleagues with whom I worked on the Ethyl case: Robert Burka, Paul Pautler, Margaret Slade and David Scheffman. I have also benefited from the comments of Bill Dudley, Richard Gilbert, Charles Holt, Jack Kirkwood, Warren Schwartz, Joe Simons, and my discussant, Thomas v. Ungern-Stemberg. Many of the ideas considered here have come out of joint work with Judith Gelman and are discussed more formally in Gelman and Salop (1983). Financial support for this research has been provided by the Bureau of Economics of the Federal Trade Commission.